A musician earns money by doing performances and producing music at the request of clients and making the music available online (for a fee). In the first three years of his sole proprietorship, expenses significantly exceed revenues. In the fourth year, this is different. The Inland Revenue finds that the costs are not deductible because there is no source of income.
Musician's point of view
According to the musician, his activities are a source of income. He earns money by performing and producing music at the request of customers and making the music available online (for a fee). Given the market and the research he did when drawing up the business plan, he could reasonably assume that benefits could be achieved from the activities. He points out that those benefits were also achieved and a positive result was eventually achieved after three start-up years. That no profit was achieved in the first few years was because investments had to be made.
Tax authorities' position
The Inland Revenue argues that there is no source of income because no benefit can reasonably be expected from the activities.
Review by court
The court assesses whether the musician could reasonably expect to benefit from his activities. Is the performed activity foreseeably permanently loss-making, or can it reasonably be expected that this activity will (in the future) yield positive pure income. The burden of proof that there is an objective expectation of benefit lies with the musician. He must state and, in the event of a dispute, demonstrate on what basis it can be judged that benefit could be objectively expected.
The musician claims deduction of expenses. He points out that he has undertaken all kinds of activities that prove the existence of a business; he mentions, among other things, making a logo, placing advertisements on websites, making business cards, making a billboard, creating e-mail addresses, registering domain names and creating websites. The musician also argues that the investments he has made for hobby purposes are of no use. For instance, he cannot use the lighting and sound equipment in his home because of the size of his flat. The musician also points out that the results achieved are in line with his forecast in the business plan he drew up and are on an upward trend.
Pointing to the negative profits posted, the Inland Revenue takes the view that the presence of a source should be assessed by looking at profits without using tax facilities such as the arbitrary depreciation. With regard to the profits made after the first three years, the Tax Authority argues that they are marginal profits and (over all years) are far outweighed by the losses incurred. The Tax Office also points out that the turnaround from loss to marginal profit is only caused by the use of arbitrary depreciation in the first three years, resulting in no depreciation in the later years. The Tax Office further argues that when depreciation is evenly spread over all years, there is a loss. According to the Tax Office, the musician should have known in the second year that he could not reasonably rely on his business plan because the turnover at that time was much lower than estimated.
The results booked by the musician (before entrepreneurial deduction) in the first four years, around €21,000 loss in three years and once €231 profit, in the court's opinion make it clear that no benefit could reasonably be expected from the music activities in these years.
The court considered that the musician had recorded low turnovers in eight years each time. The highest annual turnover was €3,434, which was offset by costs of €2,984. Turnover in recent years does not show an upward trend.
While it is true that the COVID-19 pandemic, as the musician argues, could be a cause of the disappointing results during that period, the court does not find it plausible that this is the main reason for the disappointing results. After all, the musician's work largely consists of producing music at the request of customers and making the music available online. These are activities that could go ahead during the COVID-19 pandemic.
For a correct assessment of the objective benefit expectation, the tax facilities, such as the arbitrary depreciation, should be abstracted from and the business result should be used. Over the first eight years, there was an operating loss of over €30,000.
The musician's business plan cannot serve to substantiate the existence of an objective expectation of advantage. The musician has based his business plan on market research carried out by third parties, such as Buma Stemra and ABN AMRO, which focus more on general trends of the (electronic) music market. In his business plan, the musician mentions general figures from these surveys. The court does not consider these figures suitable for estimating the potential profitability of the musician's intended activities. After all, the musician himself has stated that he is targeting a niche market. He has not conducted any market research for his intended niche activities.
Conclusion
The court considered that over eight years, the musician had made a total loss of over €30,000. In the last three years, the result was indeed very slightly positive; still, this qualifies the activities as a form of income spending and not as (an attempt at) income generation.
Note: The assessment of whether a net benefit is to be expected from an activity and whether the activity can therefore justify a deduction of costs should be made on a business basis. Several years may be involved in this assessment. Slightly positive results in later years do not always outweigh the size of the total costs expected at the outset.
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