The Tax Appeals Tribunal (Tribunal) and the High Court have recently issued decisions concerning the tax treatment of labour outsourcing, secondment and staff cost recharge arrangements.
Taken together, these decisions confirm that the tax treatment of labour outsourcing and secondment arrangements depends on the legal and economic substance of the arrangement, rather than the labels adopted by the parties or the structure of the invoice.
These decisions address the following recurring tax questions, particularly in relation to pay as you earn (PAYE), withholding tax, and value added tax (VAT) implications.
Where the supplier is the legal employer, the full invoice amount (salary and service/management fee) is subject to VAT and withholding tax
Where an entity retains the employment relationship and is responsible for recruiting staff, paying salaries, making the statutory deductions and undertaking other human resource obligations, the entire invoiced amount is subject to VAT and withholding tax. In such circumstances, the staff are not regarded as third parties, and their salaries do not qualify as disbursements which are to be excluded from the taxable value under section 13(5) of the VAT Act, section 2 and 35 of the Income Tax Act.
Where the supplier acts as an agent, only the service/management fee is subject to VAT and withholding tax
Where an entity operates as an agent and the underlying costs are invoiced in the client’s name, and the company acts purely as a paying agent, only the service/management fee is subject to VAT and withholding tax.
PAYE obligations depend on the nature of the secondment
Where employees are formally employed by one entity, but are seconded to another entity, with their primary employment remaining dormant, the obligation to account for PAYE on their remuneration rests with the entity to which they have been seconded. However, where the seconded employees remain employees of the primary employer and continue to be remunerated in that capacity, the PAYE obligations remain with the primary employer.
Businesses should clearly identify which entity is the legal and economic employer, which entity exercises control and supervision over employees and which entity bears the relevant employment obligations. The contractual terms, invoicing arrangements and implementation of the arrangement should be aligned, as the courts will consider the substantive nature of the arrangement rather than the labels adopted by the parties.
