Currently, a court decides whether the provision of services was performed under the terms of civil law contracts, including a B2B contract, or whether it met the criteria for determining that work was performed under an employment contract. Recently, however, there has been much talk that these powers will also be granted to the National Labor Inspectorate (more on this in " New Powers of the National Labor Inspectorate | Graś i Wspólnicy (kglegal.pl) ). But what are the tax and insurance implications of reclassifying a B2B contract as an employment contract? This is discussed in today's Tax and Labor Policy.
A B2B contract involves the collaboration of two independent entrepreneurs. This means that each is responsible for their own public law settlements. However, the situation is different in the case of an employment relationship. Here, the employer becomes the payer of both social security contributions and income tax. In the case of an employment contract, the contract itself is the basis for payment. In the case of a B2B contract, the invoice is issued by the service recipient. VAT is added to the invoiced remuneration, unless the service recipient benefits from an exemption. In both cases, the remuneration constitutes a tax-deductible expense for the employer/service provider. Furthermore, in the case of a B2B contract, the recipient can deduct the VAT shown on the received invoice. For the service provider, the advantages of a B2B contract include not having to settle the service recipient's tax and social security contributions. Furthermore, labor code regulations, such as those regarding vacation leave or maximum working hours, do not apply. A benefit for the service recipient is the ability to settle business expenses, such as telephone or car expenses.
If it is determined that, despite concluding a B2B agreement, services were provided under conditions consistent with an employment contract, it is assumed that the effects of an employment relationship have occurred. This means that the former service provider is obligated to pay outstanding social security contributions and income tax advances. Furthermore, they lose the right to deduct VAT from received invoices. This necessitates amending VAT settlements, which will result in the payment of tax plus interest or a reduction in the excess. The former service provider also risks imposing an additional tax liability of up to 30% of the irregularity.
Tax consequences will also arise for the current service recipient. If their business activity is questioned, recognition of business expenses and deduction of VAT from purchase invoices will be inappropriate. Therefore, the service recipient should also make appropriate corrections to their tax returns.
The risk of contract reclassification applies not only to ordinary employees but also to management board members who provide services to the company as part of their own business activities. It is common practice in many companies to enter into cooperation agreements with management board members.
To protect yourself in the event of a potential audit or a lawsuit seeking to establish an employment relationship, we encourage you to contact our law firm. We conduct audits of concluded contracts and consult on the terms of services provided to determine whether they actually correspond to an employment relationship.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of August 25, 2024
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