28 Nov 2024
Improvements to the ET scheme
Tips for applying the ET scheme in practice
The scheme for extraterritorial costs, often referred to as the ET scheme, is widely used in the temporary employment sector. We previously wrote extensively about the conditions for the ET scheme. During the SNA inspections of Normec VRO and the tax audits of Forvis Mazars, we come across many applications of the ET scheme. Although the temporary employment sector is now often well-adapted to the arithmetic aspects of the ET scheme, the administrative recording often still appears to be a bottleneck. In this article, Julisa Fereijra-Phelipa (Normec VRO) and Marco Zimmerman (Forvis Mazars) discuss some common problems surrounding the ET scheme and provide tips for improving the administrative processes.
Administrative challenges in the application of the ET scheme
During our SNA inspections, we regularly encounter the use of the ET scheme. The SNA Standards Manual contains specific assessment criteria regarding the subject of exchange and ET, as set out in interpretation report 2023-014a. A few years ago, we mainly found irregularities in the correct exchange of various wage components. It now seems that most employment agencies have implemented solid processes to ensure that the arithmetic aspect of the exchange is correct. Nowadays, we often encounter shortcomings in the administrative recording.
This starts with making it plausible that someone is an ET employee. In practice, it appears that many companies do not or do not fully comply with the six conditions of the covenant. For example, essential documents, such as the recruitment list or residents list, are often missing or do not meet the requirements. As a result, employment agencies often have to rely on the free evidence doctrine. However, it appears that in these cases too, files are often missing or incomplete. We regularly receive files that only contain a foreign driver's license, proof of ownership of a foreign car or envelopes with a postal address abroad, without any further content. In other words, documents that do not necessarily substantiate that a temporary worker is temporarily staying in the Netherlands for work.
Common bottlenecks in administration
Another bottleneck is the substantiation of the amount of the costs that are exchanged. For example, when reimbursing travel expenses for home leave tax-free, the Tax Authorities expect proof of costs incurred. Housing allowances must also be supported by documents such as rental agreements and invoices. These administrative requirements are often overlooked.
Tips for improvement
Julisa Fereijra-Phelipa therefore advises employment agencies to set up their processes in such a way that the administrative requirements are met before wages are exchanged. This not only prevents errors, but also provides certainty to both parties. As we often say in the inspection world: “Trust is good, recording is better.”
Current issues with building up vacation days
We also notice during our inspections that the ET scheme still makes you think even after 14 years. An example of a current challenge is the accrual of holiday rights. Employees with a secondment agreement who do not use the agency clause often do not accrue sufficient holiday rights due to the wage exchange.
To understand this properly, it is important to consider again how the agency clause works in combination with holiday rights. Article 26 paragraph 1 of the Collective Labour Agreement for Temporary Agency Workers stipulates that temporary agency workers are entitled to 16 2/3 hours of holiday or a proportionate part thereof per full working month. An exception applies to temporary agency workers with a agency clause whereby (in 2024) 10.82% must be reserved. In practice, this means that holiday days are reserved in money when the agency clause is applied, and are accrued in time in the case of an agreement without a agency clause.
However, the wage exchange creates a challenge in the calculation methodology of temporary employment software: the holiday rights are calculated in euros after exchange, but divided by the hourly wage before exchange in order to pay out against the original wage. This can lead to the holiday right in time for employees without a temporary employment clause being insufficient.
Collective labor agreement parties ABU and NBBU have explained that when taking and paying out vacation days, the wage after exchange must be used. However, this entails implementation problems, especially when there is no structural exchange up to the minimum wage. For a long time, there was no consensus on how to tackle this. In May 2024, an agreement in principle was reached on the new collective labor agreement for temporary workers, which includes an important change: the exchange rate for the ET scheme will change to 100/100 as of January 1, 2025, which means a farewell to the exchange rate of 0.81 that has been in force since 2010. According to the new collective labor agreement text, which will come into effect at the same time, reserves and rights will henceforth be calculated on the wage before exchange, instead of after exchange, as was the case until the end of 2024. This solves the previous implementation problem for the future.
Consultations are still ongoing between SNA, ABU and NBBU regarding retroactive restoration within the SNA quality mark, with Normec VRO having an advisory role as an inspection body.
What does this mean for your SNA-inspection?
If the above situation occurs, it will temporarily lead to a non-conformity which must be remedied as soon as there is consensus on the solution.
Practical experiences of Forvis Mazars
Employment agencies are regularly confronted with tax audits. When they work with migrant workers, the ET scheme is often a point of discussion. Common bottlenecks concern the substantiation of costs that are reimbursed or provided tax-free, but also the question of whether the ET scheme may be applied to an employee. A sound substantiation is required for tax purposes and can consist of declaration forms, receipts, or an extensive cost investigation—the latter is mandatory for extraterritorial costs that are reimbursed as a fixed amount.
Common bottlenecks in tax audits
A major stumbling block is the reimbursement of home leave. The Tax Authorities often require more evidence than just an estimate of the number of trips home; declaration forms and additional evidence are needed to justify the tax-free travel allowance. Problems also often arise with housing. It happens that a net allowance is stated on the pay slip while the employer provides housing in kind, which leads to additional assessments. Another point of attention is the substantiation of the cost of living allowance (COLA), or additional costs for subsistence. LTO amounts are often used, but the Tax Authorities state that only LTO members may apply these amounts and this is included in the published arrangement with LTO. This means that employment agencies must have their own substantiation for the COLA compensation, with specific amounts per country.
Forvis Mazars' solutions
To meet these challenges, Forvis Mazars has developed its own calculation method for determining the additional cost of living, based on EUROSTAT statistics. Every six months, Forvis Mazars calculates the difference in the cost of living per country, compared to the Netherlands, and determines a weekly tax-free amount that can be paid to employees. Since the introduction of the statutory minimum hourly wage, the COLA allowance takes into account the working hours per sector. For example, a tax-free amount of €33.41 per week can currently be used for Polish employees, and €23.48 for Bulgarian employees for a standard working week of 40 hours. If you would like to know more about the substantiation of the COLA amounts or about other aspects that are discussed during a tax audit, contact Marco Zimmerman.