1737. Labour brokers and service providers
June 2009 – Issue 118
The draft version of the Revenue Laws Amendment Bill, 2008 (RLAB) proposed far-reaching changes to the employees’ tax treatment of labour brokers and entities providing personal services, including the abolition of the labour broker regime in its entirety.
In terms of the RLAB, the definitions of a labour broker, a personal service company and a personal service trust would have been deleted and replaced by a single definition of a "personal service provider" (PSP). However, the draft PSP definition appeared to deal with services rendered by individuals as well as corporate entities and trusts. Since there was no proposed amendment to the definition of remuneration in respect of independent contractors, the intended application to individuals was not clear.
In light of public comments submitted to National Treasury on the proposed amendments, the changes contained in the draft Bill were subsequently revised.
The Portfolio Committee on Finance’s Response Document on the RLAB indicates that the proposed unification of regimes was intended to remove the duplication of deemed employee regimes, especially the need for labour brokers obtaining SARS exemption certificates for PAYE withholding by employers. However, the initial proposed change actually adds to the compliance burden when overall relief was intended. The proposed personal service provider regime will accordingly be changed to unify only the personal service company and trust regimes. The labour broker regime will also be limited solely to individuals. This narrowing of the "labour broker" definition will eliminate most of the exemption certificates currently being requested.
In terms of the revised amendments contained in the Revenue Laws Act No. 60 of 2008, there are two main changes to the existing regime:· The definition of a labour broker will be retained in the Fourth Schedule to the Income Tax Act, but will only apply to natural persons, that is, individuals who are sole proprietors carrying on a labour broking business. · The new definition of a "personal service provider", unlike the previous draft version, essentially combines the existing definitions of a personal service company and a personal service trust into one definition.
These amendments will be effective from any year of assessment commencing on or after 1 March 2009.
The effect of these proposals will be that the current situation for individuals trading as sole proprietors will remain unchanged. If they are carrying on a trade as a labour broker, an IRP30 exemption certificate will still be required, failing which employees’ tax must be withheld from their fees. The proposal in the draft Bill to provide exclusion where the labour broker employs three or more full-time employees has been omitted from the enacted amendments.
Where services are rendered by a corporate entity or a trust, clients utilising the services of that entity or trust will no longer have to determine whether the entity is a labour broker. This change is to be welcomed in the light of the difficulties in drawing a distinction between the provision of labour and the provision of a service. Thus, IRP30 exemption certificates will no longer be required for companies or trusts which are labour brokers.
However, employees’ tax will have to be withheld from fees paid to a "personal service provider" as defined. Accordingly, clients using the services of a corporate entity or trust will still be required to determine whether that entity or trust is a personal service provider, based on the new definition.
A personal service provider means any company or trust, where any service rendered on behalf of such company or trust, to a client of such company or trust, is rendered personally by any person who is a connected person in relation to such company or trust, and any one of the following three conditions is fulfilled:1. such person would be regarded as an employee of the client if the service was rendered by that person directly to the client, other than on behalf of the company or trust; or 2. where those duties must be performed mainly at the premises of the client, the person or the company or trust is subject to the control or supervision of the client as to the manner in which the duties are performed or are to be performed in rendering such service; or 3. where more than 80% of the income of that company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of the company or trust, or any associated institution as defined in the Seventh Schedule to this Act, in relation to that client.
The two important exclusions in the existing personal service company/trust definitions will remain part of the personal service provider definition:· The first is where the company or trust throughout the year of assessment employs three or more full-time employees who are on a full-time basis engaged in the business of that company or trust of rendering any such service, other than any employee who is a shareholder or member of the company or trust or is a connected person in relation to such person. Accordingly, companies or trusts with three or more qualifying full-time employees will not constitute a personal service provider and will not be subject to employees’ tax withholding on their fees.
It is interesting to note that, when applying the personal service provider definition to a trust, the exclusion of three or more employees does not refer to a beneficiary of the trust, but only to employees who are shareholders or members of a company or close corporation. This means that an employee who is a beneficiary of the trust (and therefore a connected person in relation to that trust) would not have to be excluded from the number of employees to determine whether the above exclusion applies. Similarly, anyone who is a connected person in relation to a beneficiary of the trust would also not have to be excluded. Presumably this result was unintended, since in terms of the current definition of a personal service trust, employees who are either beneficiaries of the trust, or connected persons in relation to such beneficiaries, or connected persons in relation to the person rendering the services on the trust’s behalf, must be excluded from the number of employees for the purposes of this exclusion.
The draft proposal to allow a client to rely on an affidavit or solemn declaration that the company or trust employs three or more qualifying employees is no longer contained in the amended provisions as enacted. · The second exclusion applies where the company or trust has provided the client with an affidavit or solemn declaration stating that not more than 80% of the income of that company or trust during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of that company or trust (or any associated institution), and the client relies on that affidavit or declaration in good faith.
It is clear that, except as noted above with regard to trusts providing services, the proposed amendments effectively unify the personal service company and personal service trust regimes under a single definition, and removes companies and trusts from the labour broker regime completely, thus simplifying the compliance requirements for labour brokers other than individuals.
Edward Nathan Sonnenbergs
IT Act:S 23K,
IT Act:4th Schedule par 1, definitions "personal service provider", "labour broker",
IT Act:7th Schedule definition of "associated institution"
2008 Revenue Laws Amendment Act No. 60 of 2008: s 66