Labour love lost

PAYE de­duc­tions for labour bro­kers, per­sonal ser­vices and con­trac­tors now treated dif­fer­ently

Finweek English Edition - - Creating Wealth - RUAN JOOSTE ru­anj@fin­week.co.za

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

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