25 March 2009

Changes to Employees Tax: Personal Service Providers, Labour Brokers and Independent Contractors

Introduction

Employees tax on payments to persons or entitles that are not employees is something employers often get wrong. Employers are required to withhold PAYE on payments to certain persons even though from an employment law perspective they are not regarded as employees. These include payments to labour brokers, personal service companies/trusts and independent contractors. Recent amendments to the law changed these rules and employers need to be aware of them.

Labour brokers

Previously, employers were required to withhold PAYE on amounts paid to labour brokers unless the labour broker had an IRP 30 certificate issued by the South African Revenue Services. From 1 March 2009 this requirement fell away where the labour broker is a company but not where the labour broker is a sole proprietor.

Personal service providers

Personal service companies and personal service trusts have been consolidated under a single definition that of Personal Service Providers (PSP). The new PSP definition is based largely on that of a personal service company. 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; and
  • any one of the following apply–
    • that connected person would have been regarded as an employee had a legal entity not been interposed between him and the client; or
    • the duties of that connected person are performed mainly at the client's premises and there is 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. Recipients of the services can rely on an affidavit or solemn declaration from the supplier that less than 80% of its income is generated from that recipient. Although requirements 1 and 2 may have been met, the PSP rules do not apply where that company or trust employs three or more full-time employees (other than shareholders or members) on a full-time basis who are engaged in the business of the company.

Independent contractors

The rules relating to independent contractors, that is individuals who perform services but are not employees remain unchanged. PAYE only needs to be withheld if the person performing the services is not independent. 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 does not necessarily follow that he/she is independent for tax purposes.

Conclusion

From 1 March 2009 a company is only subject to PAYE at 33% if it falls within the definition of a PSP. Employers may not necessarily be better off, unless they make extensive use of labour broking companies. The strict requirements applying to independent contractors still remain and the PSC policies were merely cleaned up and consolidated without any real changes.

Ruaan van Eeden
Tax Manager

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