Saturday, August 30, 2014

 

Paye As You Earn (PAYE)

& Other Related Taxes


About Employees Tax | About Provisional Tax | Directors & PAYE | The Effects of Tax Amendments | About IRP5's & IT3a's | About Labour Brokers | Labour Only Subcontractors
 
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THE EFFECTS OF TAX AMENDMENTS

 

As a result of recent amendments to the Tax laws that have brought about significant changes, to deal with Pay As You Earn in respect of contractors for your business, we feel it necessary to advise you of some of the consequences you need to be aware of.

 

1.             Usually the out sourcing/contracting of services relates to the provision of services in respect whereof:

 

1.1                 The Client

 

1.1.1        Gains skills he needs for his business;

1.1.2        Can use them full or part time for as long as he required them;

1.1.3        Can pay the going rate for such skills without all the frills and problems or full time employees;

1.1.4            Can stop using the contractor as and when it suits him without going through complex procedures in respect of the Labour Law.

 

1.2           The Contractor

 

1.2.1        Can market his skills as he pleases;

1.2.2        Can increase his earning power;

1.2.3        Is free to determine whatever medical aid, retirement and similar needs he wishes to pay for;

1.2.4        Can work for a variety of employers;

1.2.5            Can gain some control of his life, and determine his working hours etc.

 

2.       Both parties, (client and contractor) have tried with some success to show in the past that the contractor is not an employee, allowing him to claim tax deductions against the costs, including the conducting of his business activity. If he can be deemed to be an employee then his deductions fall away.  It is these claims that have been the source of SARS' irritation with regard to the use of contractors.  The result is the imposition of measures in the recent amendments which now try and drag the contractor into the PAYE nett.

 

3.       There is no doubt that there was abuse of the situation by contractors in the past.  In addition to the use of close corporations and similar vehicles to maximise the reduction of tax liability for what it was, in effect income, was abused by both parties.  In terms of the Labour Act there were only two types of workers, one being an independent contractor and the other, an employee.  SARS has for years battled to make a differentiation between these two categories.

 

4.       As a result, SARS now holds the employer responsible for the PAYE that is due.  Should the employer not confirm to the changes of the Act, to consider the contractor's tax affairs, it may result in a short payment of income tax, for which the employer will be held accountable, with the relevant penalties having to be paid.

 

5.       Initially the term labour worker, was first seen in 1993 to accommodate the use of close corporations, as private employment companies in order to avoid paying PAYE.  An individual would establish a close corporation and invoice the client directly.  The definition of labour broker is now part of the fourth schedule and refers specifically to the provision of workers and specifically not service, to a client in return for a fee.  Subject to certain conditions the labour brokers obtains a tax exemption certificate (IRP30) against presentation of which no PAYE is deducted, prior to money being paid to the labour broker.  Therefore the use of such accredited labour brokers presents the safest method of dealing with contractors of all types, as the contractors they place, are deemed for tax purposes to be their employees and thus they must address the PAYE problems, not the client.  This relieves the client of any obligations and responsibilities especially that of dealing with SARS and the PAYE requirement.  It is important to have a contract between the client and the labour broker as there is joint and several liability attached to any labour dispute between the labour broker, client and employees.

 

6.       The only legal requirement that the client is required to receive from the labour broker is the IRP30 tax exemption certificate.  It would however be recommended that one obtains copies of both the PAYE certificate and VAT certificate in order to be satisfied that the labour broker is duly registered for both items.  Should you not receive an IRP30 tax exemption certificate, you are required to deduct PAYE from payments made to the contractor.  An important consideration to note is that the certificate is renewable every year and must be presented to you each and every new tax year.

 

 

7.       If no IRP30 is available, all payments must be made subject to the tax as follows:

 

7.1           For individuals, employees tax must be deducted according to the IRP10 table.

7.2           Where a tax directive has been issued the deduction of PAYE must be according to the instructions on the directive.

7.3           If the labour broker is a company or a close corporation, tax must be deducted at the applicable company tax rate.

7.4           All tax deducted must be shown as PAYE on an IPR5 certificate.

 

8.       Having now dealt with labour brokers, we can now turn to areas where an employer already faces an inquisition in respect of SARS relating to the use by the client of individuals or companies that invoice directly for the work carried out.  Two basic questions are asked:  Is the client dealing with an individual, or is the client dealing with a company, trust or close corporation:

 

8.1                Individuals

 

Is the individual an independent contractor?  If yes, then no PAYE is deducted.  If no, then deduct PAYE according to the tax table/directive.  There are various tests of independence that can be applied with regard to independent contractors, and the questions to be asked are as follows:

 

8.1.1        Is the payment made to the person for services rendered?  If no, PAYE is not deducted.  If yes, then the test applies as follows:

8.1.1.1     Does the person work full time for the client?

8.1.1.2     Does the person do this work for other clients?

8.1.1.3     Is the person under control of the client, times of work, quality, leave, etc.

8.1.1.4     Does the person receive benefits like medical aid, pension fund, etc.

8.1.1.5     Does the client supply equipment for the work to be carried out?

8.1.1.6     Is the person paid at regular intervals?

 

If the answers to these questions suggest that the person cannot be classed as an employee of the client, and is therefore independent, PAYE need not be deducted.

 

8.2                Company, Trust or Close Corporation

 

The first question to be asked is whether the company is a labour broker?  If yes, does it have a current IRP30, if yes, no PAYE is deducted.  If no, deduct tax at the rate of 34%.  Are services rendered by the members or shareholders of the company?  If no, PAYE is not deducted.  If yes, it is a personal service company.  If no, no PAYE is deducted.  If yes, PAYE is deducted at the rate of 34%.

 

9.             What is a Personal Service Company?

 

As a result of abuse of companies, close corporations and trusts to invoice clients who would otherwise be seen as employees and to claim expenses that would not be allowed in the hands of individual employees.  A personal service company was created which is a new entity defined in the amendments of the Income Tax Act, as:  any company/close corporation or trust excluding a labour broker whose service is personally rendered by someone who is a connected party to the company.  The following test can be applied to determine if the entity is a personal service company:

 

9.1                 Are there more than three (3) employees.  If yes, it is not a personal service company, and no PAYE is deducted.  If no, the main criteria for being a personal service company is met, if any one of the following further criteria is also met the entity is a personal service company, then PAYE is due.

9.2                 If there is controlled supervision by client as to hours worked.  If no, apply the next test.  If yes, PAYE is deducted at the rate of 34%.

9.3                 Are fees paid on a regular basis?  If no, apply the next test.  If yes, PAYE is deducted at the rate of 34%.

9.4                 Are more than 80% of fees obtained from client?  If no, PAYE is not deducted.  If yes, PAYE is deducted at the rate of 34%.

 

10.           The problem one is faced with, is the terms of the truth and relevance of these answers.  Most clients want to make sure the contractor is doing the work they are getting paid for, therefore what is controlled supervision in this case.  Furthermore, how is the client expected to know the relationship between the person doing the work and the people who own the company.  A personal services company is included in the definition of an employment company, as is the labour worker without an exemption certificate.  There are three penal provisions regarding the taxation of an employment company.

 

10.1         The rate of tax applicable is 34% as against 30% for other companies.

10.2         PAYE must be deducted from any remuneration paid to an employment company.

10.3              When such a company is assessed for tax it will not be allowed any deductions from tax or income, other than the taxable remuneration paid to its employees.  Employees include, of course, shareholders and members.  In the case of a personal service company deduction of PAYE will be little more than a nuisance, apart from its effect on the cash flow of a close corporation, that is, it will be paying 34% PAYE on its gross receipts without allowing for the remuneration that it pays to its employee in the gross amount.  But this will not really be serious as PAYE will not normally be deductible on the payments made by the close corporation to the employee as the employee will usually be a member of the close corporation.  However as from March 2002 this position has changed in that directors and members of close corporations will be subject to PAYE.  From this date the services company will be paying PAYE of about 70% (34% deducted by his client, and approximately 34% deducted from remuneration paid to its members).  The only expense allowed from the gross income it receives will be the taxable remuneration it pays its employees.

 

11.     In the circumstances if the close corporation appears as a service close corporation and may be classed as a personal service company, the logical approach would be to cease operations as a close corporation and trade as a sole proprietor or sole partnership to avoid the "double taxation".

 

12.     Therefore bearing in mind the amendments, and the consequences for both the contractor and the client, we would suggest that you look into the current relationships that you may have with regard to independent contractors, labour brokers and personal services companies and the like to ensure that you comply with the relevant legislation.

 

The information provided herein has been supplied to us for distribution to all PSIber users courtesy of our Legal and HR partners, Kim Warren, Rambau & Associates. We trust that you have found this information useful and informative, and that it sheds a little more light on the consequences of some of the recent tax changes.

 


Directors & PAYE | Page 4 of 7 | About IRP5's & IT3a's
 TitleOwnerCategoryModified DateSize 
Labour Only Subcontractor Directive (March 2005)meagan kinsman 5/27/200556.00 KBDownload