Business expenses under scrutiny: Innocent oversight or playing with fire?
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The deduction of expenses from business profits is a significant tax benefit for entrepreneurs, but this deduction is subject to strict rules. Only expenses that are genuinely incurred for the benefit of the business qualify for deduction. However, the boundary between business and personal expenses is not always clear-cut. What happens in borderline cases? And how far may the Tax Authorities or the courts go in their assessments? This blog discusses the tax rules on business expenses, relevant case law, and the risks of unjustified deductions, including potential criminal consequences in cases of fraud.
Only business-related expenses are deductible
Only expenses with a business-related character are deductible from a company’s profits. This means the expenses must be incurred for the benefit of the business and not for private purposes. This follows from the principle that only profits are taxed, and the method by which profit is calculated (in broad terms: revenue minus business expenses). The Dutch Tax Authorities have announced that they will increase scrutiny in this area.
Notable are the Cessna, Bentley, and Racehorse judgments. The key conclusion from these rulings is that neither the Tax Authorities nor the courts may step into the shoes of the entrepreneur to decide what is in the business’s best interest—that is the entrepreneur’s prerogative. However, if expenses are grossly disproportionate to the business benefit they provide—such that no reasonable entrepreneur would incur them—they are not (fully) deductible. Expenses with both business and private aspects, such as mobile phone use, are partially deductible.
In borderline cases, It may be worth challenging the assessment
If the Tax Authorities assert that certain expenses are not (fully) deductible, this is not the final word. Ultimately, it is the court that decides whether expenses are deductible. For example, in 2024, the Dutch Supreme Court ruled that an entrepreneur residing in Limburg who travelled for work to Amsterdam and Tilburg was entitled to deduct accommodation and meal expenses (breakfast, lunch, and dinner) from his profits. The lower court and the Court of Appeal had held that the meals were predominantly of a private nature, based on the necessity of eating and drinking. However, the Supreme Court disagreed. Furthermore, no penalties may be imposed in doubtful cases, particularly where an accountant or bookkeeper was aware of the nature of the expenses and did not raise questions.
In clear-cut cases, caution and legal support are essential
There are also situations where expenses are knowingly deducted that are clearly non-business in nature—i.e., fraud. False invoices are often used to deceive accountants or bookkeepers. For instance, in 2010, interior designer Jan des Bouvrie was arrested after allegedly issuing invoices to a real estate company that, according to the Tax Authorities and the Public Prosecution Service, actually related to the furnishing of the real estate trader’s private homes. Des Bouvrie settled the criminal case.
Where the tax shortfall—i.e., the unpaid tax—amounts to € 20,000 or more and there is a suspicion of intent, the tax case must be reported to the Public Prosecution Service for potential criminal prosecution. When the amount exceeds €100,000, the standard approach is to prosecute criminally.
Accountants may also question the business nature of certain expenses. In many such cases, they are required to report unusual transactions to the authorities under the Dutch Anti-Money Laundering and Anti-Terrorist Financing Act (Wwft). In the context of a statutory audit of annual accounts, accountants are also required to report any reasonably suspected material fraud to the investigative authorities. However, they are not obliged to report if the client presents a corrective plan to undo the fraud and prevent recurrence, and implements that plan as soon as possible. In many situations, a supplementary VAT return must also be filed to correct the VAT implications of the fraud.
If the Tax Authorities or the accountant question private expenses claimed as business deductions, it is advisable to consult a tax attorney and discuss whether, and if so how, to disclose the matter.
Conclusion
This blog has addressed the increased attention by the Tax Authorities to entrepreneurs who deduct private expenses as business expenditures. Only expenses with a business purpose are deductible from profits, and such expenses must clearly relate to the operation of the business. If expenses are clearly disproportionate to the business benefit, they may be disallowed. In borderline cases, however, it may be worthwhile to challenge the assessment, as demonstrated in a recent Supreme Court ruling where an entrepreneur’s meal expenses were ultimately deemed deductible.
Where there are clear cases of private expenses being passed off as business-related—especially through false invoicing—this constitutes fraud. In such cases, accountants may be legally required to report the conduct, including under anti-money laundering legislation. When questioned by the Tax Authorities or an accountant about such deductions, it is strongly recommended to seek legal advice and carefully consider whether, and how, to disclose the facts.
This article is translated from Dutch to English with ChatGTP and may not be 100% accurate. Although we try to reproduce the original Dutch text as accurately as possible, no rights can be derived from the content of machine-translated texts.
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