Labour love lost
PAYE deductions for labour brokers, personal services and contractors now treated differently
EMPLOYEES’ TAX ON PAYMENTS to people not employees is something employers often get wrong. Employers are required under the Income Tax Act to withhold pay-as-you-earn ( PAYE) on payments to certain persons even though from an employment law perspective they aren’t regarded as employees. Those include payments to labour brokers, personal service companies/ trusts and independent contractors. Recent amendments to the law promulgated under the Revenue Laws Amendment Act 2008 will change the way that’s done and employers need to be aware of them.
Currently, employers are required to withhold PAYE at the rate of 33% on amounts paid to labour brokers unless the labour broker has a valid IRP30 exemption certificate issued by the South African Revenue Service. In essence, a labour broking service is the supply of people to a client where that client obtains the productive capacity of the people supplied and deploys them as required within the business.
A simple example is where an agency is approached by a client to source a shortterm secretarial appointment. The secretary remains on the agency’s payroll and a fee is charged to the client for as long as the service is required. That’s different to a consulting service, where payment is made based on a specific deliverable without reference to the productive capacity of the person performing the service (ie, the person is not directly subject to the supervision and control of the client).
From 1 March 2009 an IRP30 exemption certificate is no longer required if the labour broker is a company – but not if the labour broker is a sole proprietor. That means a taxpayer making use of a labour broking company won’t be required to withhold PAYE. However, labour brokers trading as sole proprietors without a valid IRP30 exemption certificate must still withhold PAYE in accordance with the individual tax tables.
Personal service companies and personal service trusts will also be consolidated under a single definition, that of personal service providers (PSP). A company or trust will be regarded as a PSP when a connected person (usually the shareholder, member or beneficiary) to the company or trust personally renders the services to his client. In addition, he would have been regarded as an employee had a legal entity or trust not been interposed between him and the client; or the duties are performed mainly at the client’s premises and there’s supervision and control about the manner in which the duties should be performed; or more than 80% of the company’s or trust’s income is derived or is expected to be derived from one client.
“The ‘80% rule’ usually creates difficulty, since the recipient of the services might not know if the service provider has other clients and the income they generate,” says Ruaan van Eeden, tax manager at Cliffe Dekker Hofmeyr. “However, recipients of the services can rely on an affidavit or solemn declaration from the supplier.
“Although those requirements may have been met, the PSP rules don’t apply where that company or trust employs three or more full-time employees (other than shareholders or members or beneficiaries) on a full-time basis who are engaged in the business of the company or trust,” Eeden says.
The statutory and common law tests relating to independent contractors will remain unchanged. PAYE only needs to be withheld if the person performing the services isn’t independent. “A person is deemed not to be independent for employees’ tax purposes if the services are performed mainly at the premises of the client and he is subject to the supervision or control of any other person as to the manner in which his duties are to be performed or as to his hours of work,” says Van Eeden. “However, there is an escape clause, where a person will be deemed to carry on an independent trade – notwithstanding the statutory tests above – if he employs three or more unconnected employees engaged in the business on a full-time basis.
“Determining independence for tax purposes can be complicated, as various statutory and common law rules need to be applied and even though a person might be regarded as an independent contractor for labour law purposes, it doesn’t necessarily follow that he’s independent for tax purposes,” says Van Eeden.
From 1 March 2009 companies and trusts will only be subject to PAYE (at rates yet to be determined) if they fall within the definition of a PSP. Sole proprietors trading as labour brokers, as well as contractors deemed not to be independent for employees’ tax purposes, will be subject to PAYE at the individual tax rates.
“Employers may not necessarily be better off – unless they make extensive use of labour broking companies,” says Van Eeden. “That’s because the compliance burden associated with having to request IRP30 exemption certificates now falls away. The strict and sometimes difficult statutory and common law tests applying to independent contractors still remain and the rules governing personal service companies/trusts were merely cleaned up and consolidated without any real changes.”
Employers may not necessarily be better off. Ruaan van Eeden