The personal services provider debate heats up
In the February 2012 issue of FAnews we published an article on the tax treatment of short-term insurance brokers. The article [repeated in part here] was written in response to a notice distributed by Mutual & Federal to its brokers in November 2011. Und
The short answer is that tax legislation requires that “employers” of contractors, consultants and commission earners (even brokers apparently) that are classified as PSPs withhold PAYE from their monthly remuneration. An insurance broker singled out as a PSP therefore faces serious cash flow difficulties. Imagine running a brokerage with a million-rand-plus annual turnover when a third of your monthly receipts are docked for income tax! To better understand the issue we must first grasp what a PSP is.
Defining the personal services provider
The South African Revenue Services (SARS) Interpretative Note 35, published 30 March 2010, defines a PSP as 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
(a) such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company or trust; or
(b) where those duties must be performed mainly at the premises of the client, such person or such company or trust is subjected to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; or
(c) where more than 80 per cent of the income of such 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 such company or trust ... except where such 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 such 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.
Financial services IT provider Astute explains it as follows: “Personal Service Providers’ are specific types of employees in the Income Tax Act no. 58 of 1962. All product providers are obliged to deduct employee’s tax (PAYE) from all remuneration paid to companies, close corporations and trusts that meet the definition of a PSP in the Act.”
Huge tax consequences for those who “qualify”
The Act requires an employer to deduct PAYE from the PSP at a rate of 33% (companies and close corporations) and 25% (trusts). And remember – sole proprietors are treated as companies for tax purposes. A 33% reduction in monthly turnover could have catastrophic consequences for small brokerages that currently pay their income taxes on a provisional basis. At least one of our readers reckons this change will render his brokerage (and him personally) technically insolvent.
Another observes that an insurer with more than a thousand clients on his books could still be classified as a PSP if the bulk of this business is with a single provider! We wonder whether SARS intended for a company of this size to qualify as a PSP… Even so, SARS believes they have addressed any concerns by making it possible for the PSP to apply for a tax directive for a lower rate of tax that more closely matches its final tax liability. (In practice obtaining such directives can be tricky).
Is Mutual & Federal doing the right thing? The insurer has no option but to comply with the law and must implement the SARS directive. “PAYE will be deducted until such time brokers can provide documentary evidence exempting them from this requirement,” advised Harold Vos, Agency Manager of Business Systems Support at the insurer.
Few alternatives available to brokers
Astute – who is handling the PSP “audit” for Mutual & Federal and other insurers – has since offered additional comments on our article. They say that the crux of the matter is the wide application by SARS of the “Personal Service Provider” clause… They also reveal that most of the objections to the process have been against the requirement to conduct the audit annually, rather than the PSP or not classification. The group approached the Financial Intermediaries Association (FIA) for the “best practice” approach to this annual requirement. Justus van Pletzen, CEO of the FIA, responded as follows: “We communicate this [the requirement for an annual audit] to our members quite regularly, and SAIA has also communicated it to their members on a few occasions.” In other words – brokers have to “prove” their PSP or not status to the product providers each year… And if they are PSPs the insurer must withhold PAYE!
Astute is only involved in the process as a service to various insurers. “Some insurers appointed us to obtain the information annually,” they say. “This arrangement makes it easier for the intermediary who is responsible to inform all insurers.” It is not clear at this stage whether all insurers apply the PSP rule – though some insurers are unhappy with the arrangement. Astute concludes: “In the end – or at least for now – it is a business decision whether an Insurer wants to take the risk or not. The only solution to the problem is to ensure that all insurers apply the rule OR that the industry convinces the Receiver to change the Act!”
What can brokers do? There aren’t too many options. The simplest solution would be to change your business model to become a multi-insurer channel and make sure that no single insurer accounts for more than 80% or your income. Alternatively, you can approach SARS for a tax directive authorising a withholding tax in line with the actual revenues and expenses recorded in your practice. As a last resort the industry representative bodies might have a friendly “word” with SARS to have the PSP definition softened slightly.
Editor’s thoughts: The Personal Services Provider (PSP) directive was the tax authority’s response to employees who resigned from their jobs and then masqueraded as contractors to side-step their PAYE obligations… But – like many regulatory interventions – the strict definition snares many genuine small businesses and commission earners. These legitimate operations are then hamstrung by having to meet employee rather than business tax commitments. Is the PSP definition being fairly applied to financial services intermediaries? Add your comment below, or send it to gareth@fanews.co.za
Comments
Please note that the comment made above: "remember – sole proprietors are treated as companies for tax purposes" is in fact not correct. According to SARS Interpretation Note 35 a sole proprietor can not be classified as a PSP, see quote below from paragraph 7 out of that Interpretation Note:
"The term “personal service provider” is only applicable to a “company” and “trust” as
defined in section 1. This means that the term is not applicable to a natural person.
The effect of the new legislation can therefore be eliminated by rendering the service
through a natural person directly to the client. By rendering the services directly as a
natural person, the normal rules relating to the status of an independent contractor or
common law employee as explained in previous guidelines issued by SARS become
relevant."
Thus, for a natural person or sole proprietor, one needs to refer to SARS Interpretation Note 17 to determine if an individuals is an independent contractor or not.
Feel free to contact me on my email for any tax advice or other tax services. I'm a registered tax practitioner working in Pretoria.
Be blessed!
Juan Report Abuse