SARS cracks the whip on personal services providers

01 February 2012 Gareth Stokes, FAnews

The South African Revenue Services (SARS) is tasked with collecting your taxes in line with the Income Tax Act. A recent directive requires businesses to classify certain contractors, consultants and commission earners as Personal Services Providers (PSPs) and withhold PAYE from their monthly remuneration. Small short-term brokers will feel the pinch!

In November 2011 short-term insurer Mutual & Federal distributed a notice to its intermediaries. Under the heading Compliance: Tax on Companies, Closed Corporations and Trusts they alerted individuals and companies in their distribution channel of a "tax census” to determine taxpayer status. The census is conducted by Astute, which performs similar services for a number of insurance clients.

The aim of the census is to identify "brokers who receive more than 80% of their income from one source, or employ less than three full time staff.” In its basic form each broker has to answer four questions… Their answers determine whether their practice should be re-classified as a PSP or not.

In terms of the Income Tax Act an employer has to deduct PAYE from the PSP at a rate of 33% (companies and close corporations) and 25% (trusts). Remember, sole proprietors are treated as companies for such purposes. This could have catastrophic consequences for small brokerages that currently pay taxes on a provisional basis.

After reclassification these brokerages will find their monthly cash flows crimped by an alarming 33%. At least one of our readers reckons this change will render his brokerage (and him personally) technically insolvent. SARS believes they have addressed this concern 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!

What is a PSP? SARS Interpretation Note 35, published 30 March 2010, defines it 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.

Mutual & Federal has no option but to comply with the law and will take a hard line when implementing 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.

What can brokers do? There aren’t too many options. The simplest solution would be 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 practise.

How to determine whether SARS views you as a PSP

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