Friday, April 17, 2009

If you are a contractor, for example, in the engineering and environmental sectors, take note if you find yourself working under conditions similar to the following:
• You are truly an independent contractor;
• Your client has no control over the manner in which your duties are performed or your hours of work;
• The amounts of your invoices differ, with periodicity of invoicing often agreed with the client. For short term projects invoicing may be linked to the completion of certain milestones; for longer term projects billing is only for time spent on the project. When the project ends, the "remuneration" from that client ends. If no work is done, no payment is due;
• The projects on which you work may be complex and take time to complete;
• There are periods where you work on one project for one client even though there is no “employment contract” with the client or anyone else. You work for clients on a project-by-project basis; and
• You often work from your own office or from home.
If you are an independent contractor, your client does not have to deduct PAYE from payments to you unless you receive “remuneration” as defined in tax legislation. If you do receive “remuneration” PAYE will be deducted even though you are not an “employee”.
“Remuneration” is widely defined in the Income Tax Act and includes salary, leave pay, wages, overtime pay, bonuses, gratuities, commissions and fees. Typically, independent contractors receive fees.
However, amounts paid to contractors in the course of any trade carried on independently are not treated as remuneration and PAYE need not be deducted.
But a contractor will not be regarded as carrying on a trade independently if:
o services must be performed mainly at the premises of the client; and
o the manner in which the contractor works, and his hours of work, are subject to the control or supervision of any other person.
If an independent contractor employs three or more full time employees (not including connected persons) he will not be subject to PAYE.
Previously, PAYE had to be deducted from an independent contractor’s fees if his business complied with the definition of a Personal Service Company (PSC).
PSC was defined as any company (except a labour broker) where:
• services rendered to clients are rendered personally by any person connected to the PSC; and
• the person rendering the service would be regarded as an employee of the client if the service was rendered directly by the person to the client; or
• if the duties must be performed mainly at the client’s premises, the person performing the duties, or the PSC, is subject to the control of the client; or
• where more than 80% of the PSC’s income during a year of assessment consists of fees received from any one of its clients,
except where the company employs three or more full-time employees, other than employees who are shareholders, members or connected persons of the company.
The tax rules have changed: The Revenue Laws Amendment Act 2008 has incorporated “labour broker”, “personal service company” and “personal service trust” under a new “Personal Service Provider” (PSP) definition.
The criteria determining who falls into the PSP category are, broadly speaking, the same as those set out above in relation to the definition of a PSC, but employee’s withholding tax does not have to be deducted where a PSP has provided its client with an affidavit confirming that the PSP receives less than 80% of its income from a particular client, and the client relies on the affidavit in good faith.
Remember that, if you are a PSP, you will be denied the deduction of some of your ordinary business expenses. The difficulty here being that PSPs’ expenses are often high as they lack an employer’s infrastructure. By removing the ability to deduct these bona fide expenses, SARS may be crippling small business entrepreneurs.
If you are a PSP you should provide a standard declaration form to each client, setting out that you derive less than 80% of your income from each client, as a precautionary measure against PAYE being deducted from your fees.
However, where a project accounts for more than 80% of a PSP’s income, it will be deemed to be remuneration and thus subject to the withholding tax of PAYE. Even so, it is possible to obtain a SARS tax directive if the circumstances are such that the client need not withhold employees tax.
Annette Thomson is a candidate attorney in the corporate department of Bowman Gilfillan