Background on the DBA Act

Why has the VAR been replaced by the DBA Act?

The VAR served its purpose well for many years, but according to the Ministry of Finance, it needed to be replaced for a number of reasons:

• Difficult enforcement - The Tax Authorities had to check with the ZP'er whether he is indeed self-employed and whether there is no employment relationship with his Principal. With 800,000 ZP'ers in the Netherlands, this was difficult to enforce.
• Risk entirely with ZP'er - With the former VAR system, the risks were mainly with the ZP'er. If an audit by the Tax Authorities subsequently revealed that the ZP'er was in fact in an employment relationship with the Principal (depending on various factors), he would have to repay any over-received facilities such as the starter's and self-employed deductions. The Principal, if he was in bad faith, could also be held liable at that point for post-tax payroll taxes and employee insurance premiums.
• Bogus self-employment - With the old VAR system, tackling “false self-employment” was difficult. Sham self-employment is the term used for the phenomenon that employees are forced by an employer to be 'self-employed' in order to then perform the same work under the same conditions as previously performed as an employee. It is a topic that is (virtually) not addressed within the fields in which most Independent Professionals are active (business services: IT, finance, marketing, human resources and other forms of knowledge work), but is current in other industries.

What will change now that the DBA Act is in place?

The principle of the DBA Act is that the Client and ZP'er will work with a contract of assignment approved by the Tax Authorities, from which it follows that no employment relationship exists between the Client and the ZP'er. It is essential that in practice they actually work according to this agreement, so that there is definitely no employment relationship between the Client and the ZP'er. Then the Client does not have to withhold payroll taxes for the ZP'er. The result of all this is:

• Enforcement becomes easier - The Inland Revenue shifts the control of the employment relationship between the ZP'er and the Principal to the Principal. It has been announced that audits will be carried out by the Tax Authorities at organizations that hire ZP'ers. This will assess whether the actual situation matches the situation described in the agreement. This reduces the number of organizations to be checked from 800,000 ZP'ers to a few thousand hiring organizations.
• Spreading risk - By shifting the control, the risk is spread. As with the former VAR system, the ZP'er remains liable for repayment of excess entrepreneurial allowances and (payroll) tax, if it turns out that the ZP'er is not (sufficiently) self-employed. Clients can also be held liable for the subsequent payment of payroll taxes and employee insurance premiums.
• Sham self-employment - With the shift of control to the Principal, it becomes easier for the Tax Authorities to tackle Principals who force employees to become self-employed in order to subsequently hire them to perform the same work that was previously done as an employee.

More information on the DBA Act, its consequences and how to deal with it can be found in the white paper: The DBA Act explained.