2021 Budget Memorandum: Entrepreneurs and businesses

2021 Budget Memorandum: Entrepreneurs and businesses

- News

From adjustments to the work-related expenses scheme and a further reduction in the self-employed person’s allowance through to changes to corporation tax, the changes announced in the 2021 Tax Plan also have various consequences for businesses. Find out what you need to be aware of as an entrepreneur below.

Gradual reduction in self-employed person’s allowance

The self-employed person’s allowance is being reduced further. This will be compensated for by an increase in the employed person’s tax credit and a cut in income tax.

In 2021 the maximum self-employed person’s allowance will be € 6,670 (2020: € 7,030). From 2021 onwards this allowance will be reduced more quickly than had been announced in the 2020 Tax Plan. It will be lowered in eight steps of € 360, one step of € 390 and eight steps of € 110 to ultimately stand at € 3,240 in 2036.

The self-employed person’s allowance is an amount that entrepreneurs can deduct from their profit for income tax purposes, provided that they have worked as an entrepreneur for at least 1,225 hours in a calendar year and have dedicated 50% of their working time to the business. It reduces the amount on which you have to pay income tax. This means that, on balance, you need to pay over less income tax to the Tax and Customs Administration.

Offsetting of losses restricted for corporation tax

At present, a loss can be carried back one year and carried forward six years. From 2022 the intention is to allow losses to be carried forward without any time limit. It will be possible to offset losses (carried forward and back) against up to € 1,000,000 of taxable profit. If the profit is higher, losses can only be offset against up to 50% of the profit above € 1,000,000 in any one year.

Please note: A legislative proposal still has to be submitted.

Job-related investment tax credit (BIK)

From 2021 a job-related investment tax credit (BIK) will make it more attractive for companies to make investments. If companies invest in operating assets, they will be allowed to deduct a percentage of these investments from the payroll tax/national insurance contributions they have to pay. Further details will be announced by the government at a later date.

Work-related expenses scheme

Restriction of fixed budget for wage bills from € 400,000

Since 1 January 2020 a two-band system has applied to the fixed budget under the work-related expenses scheme (WKR):

This percentage will be lowered from 1.2% to 1.18% with effect from 2021. The rate applicable in the first band will remain at 1.7%.

If the allowances and benefits in kind exceed the fixed budget, a final levy of 80% is payable.

Tip: Is it possible that the allowances and benefits in kind you grant will exceed the fixed budget next year (wage bill of more than € 400,000) and are you in a position to bring them forward? If so, you can save tax by applying the 1.2% rate this year instead of 1.18% in 2021.

Specific exemption for retraining

As a result of the current crisis, the government is placing an even greater emphasis on the importance of training. From 2021 the specific exemption for training will also apply to allowances and benefits in kind granted for training arising from previous employment. This means that from 2021 onwards employers will be able to reimburse the training costs of former employees free of tax. Training costs are currently regarded as a wage from earlier employment and the employer is required to pay payroll tax on them. This relaxation of the rules will apply to allowances and benefits in kind granted for the purpose of following a training programme or course of study with a view to generating income.

Clarification of method used to calculate small-scale investment tax credit (KIA)

The small-scale investment tax credit (KIA or investment tax credit) is intended to promote investments that are relatively small in scale. The level of the investment tax credit depends on the annual investment amount. Since 2010 this tax credit has not always been a percentage of the investment amount; a fixed ceiling has applied for some investment amounts. At present, the text of the Act incorporating the investment tax credit does not make sufficiently clear how it should be calculated in the case of a business that is run by means of a collaborative arrangement, such as a partnership or general partnership.

This lack of clarity resulted in legal proceedings, in which the Supreme Court ultimately delivered a ruling. The Supreme Court ruled that, first of all, the amount of the investment tax credit must be calculated on the basis of the total amount of the investments. The entrepreneur is then entitled to a share of this investment tax credit in proportion to his/her share in the total investment amount.

However, the Supreme Court highlighted one exception to this calculation method. If the investment tax credit calculated on the basis of the total amount of the investments equals the fixed ceiling, the entrepreneur is entitled to this maximum amount. In such a case, therefore, there is no pro-rata recalculation of the investment tax credit. The government considers this to be undesirable and is changing the investment tax credit in such a way that the pro-rata recalculation will still take place. This is worked out in figures in the example below.

Example

An entrepreneur belongs to a general partnership and is entitled to 50% of the surplus profit. He also has non-partnership assets. Over the course of a year the general partnership invested € 40,000. The entrepreneur therefore invested € 20,000 (50% of € 40,000) in the business. In addition, the entrepreneur invested € 60,000 in his non-partnership assets. The total investment amount is therefore € 100,000. The fixed ceiling of € 16,307 of investment tax credit applies. According to the Supreme Court’s ruling, the entrepreneur would be able to claim this amount in the form of investment tax credit. On the basis of the proposed change to the law, this amount will be recalculated as follows: (50% x € 40,000 + € 60,000) / € 100,000 x € 16,307 = € 13,046

Lastly, the legislator has made clear that – contrary to the Supreme Court’s view – the investment tax credit must be calculated per business and not per entrepreneur. This has consequences for an entrepreneur who runs more than one business. In figures, the proposed change to the law works out as follows:

Example
An entrepreneur runs two businesses: a bicycle shop and a horse riding centre. Over the course of a year he invests € 40,000 in both businesses, resulting in a total investment amount of € 80,000. In this case, in the Supreme Court’s view, the investment tax credit would amount to the set ceiling of € 16,307. According to the legislator, the investment tax credit has to be determined per business. The investment tax credit per business is 28% x € 40,000 = € 11,200. In total, the entrepreneur can therefore claim 2 x € 11,200 = € 22,400 in the form of investment tax credit.

Tip: Investing in your business or businesses can affect the level of the investment tax credit. This means it may be worthwhile to bring forward or postpone investments. You should therefore plan your investments carefully and get advice on how to proceed.

Questions?

Feel free to contact one of our professionals!

Ask a question