1. TAX PROCEDURES Presented by: Di Seccombe
National Head of Tax Training and Seminars
Mazars

2. Personal Service provider
The term ‘personal service provider’ (PSP) is defined with reference to a company or a trust, but not an individual.
Where services are provided by a natural person (not through a company or trust), the natural person cannot fall within the ambit of a PSP; they will either be:
an employee,
a labour broker or
an independent contractor.
A PSP is included in the definition of ‘employee’ in para 1 of the Fourth Schedule of the Income Tax Act (ITA).
As a category of employee, any remuneration payable to the PSP is subject to the deduction of employees’ tax.

3. Personal Service provider
 PSP is defined in para 1 of the Fourth Schedule as a company or trust where any service rendered on its behalf to a client is rendered personally by any person who is a connected person in relation to the company or trust, and any one of the following criteria is met:
(a) The person would be regarded as an employee of the client if the service was rendered by him directly to the client, other than on behalf of the company or trust. In other words, if one disregards the company or trust, a direct employer/employee relationship would exist between the client and the person rendering the service, OR
(b) Where those duties are performed mainly at the premises of the client, the person or company 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 the service, OR
(c) More than 80% of the income of the company 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’ to the client.

4. Personal Service providers
 A personal service provider, therefore, is an entity which provides services to a client (as opposed to supplying personnel to work under the client’s control) but which does so through the medium of individuals connected to the company itself.
The difficulty with this construction is that legitimate organisations which render ‘services’ in the broadest sense of the word, and which require the limited liability of a corporate structure, may be caught within the personal service provider net and taxed at penal rates.

5. Personal Service Provider ‘escape clause’
A company (as with a trust) will escape classification as a ‘personal service provider’ if, throughout the year of assessment, it employs three or more full-time employees who are on a full-time basis engaged in its business of rendering the service, other than any employee who is a holder of a share in the company or member of the trust or is a connected person in relation to such person.
Where the number of employees falls below three during any year of assessment, the exemption is not available.
It is submitted that the employees need not necessarily render the services directly to the clients; it will suffice if they are employed in the business of the company (for example, as a typist or messenger) on a full-time basis to enable it to render the required service. .

6. Personal Service Provider Annual affadavit
 Annual affidavit
The scheme of the Fourth Schedule does not make provision for a PSP to apply for a ‘PAYE exemption certificate’.
Where a PSP furnishes the employer (‘client’) with an affidavit or solemn declaration to the effect that the more-than-80% rule does not apply and the employer concerned relies thereon in good faith, the employer is not required to deduct or withhold employee’s tax.
This holds true only if, in addition, neither (a) nor (b) of the PSP requirements is present. In other words, the acceptance of the affidavit or solemn declaration serves only to resolve item (c).
Where remuneration paid to a PSP is subject to the deduction of employees’ tax, the employees’ tax withheld may be set off against the taxpayer’s provisional tax payments.

7. Personal Service providers PAYE
Where a personal service provider is a company, the PSP is subject to PAYE at 28%.
The employer (“client”) is then required to withhold PAYE on any remuneration paid.
As stated, a company can provide an employer (”client”) with an annual affidavit or solemn declaration that the ‘more-than-80%’ rule does not apply, in which case the employer is not required to withhold any employee’s tax.
Where the personal service provider is a trust, it is subject to PAYE at a rate of 40%, unless the trust applies for a tax directive for a lower specified tax rate.

8. Personal Service provider 23(k)
Section 23(k) seeks to prohibit expenditure deductible by a personal service provider in the determination of its taxable income. The expenses that may be deducted include:
Legal expenses – s 11(c).
Bad debts – s 11(i).
Contributions to pension fund, provident fund or benefit fund for the benefit of employees – s 11(l).
So much of any amount contemplated in para (cA) of the definition of the term ‘gross income’ in s 1 (that is, restraint of trade payments) received by or accrued to any person as refunded by that person – s 11(nB).
Expenses in respect of premises, finance charges, insurance, repairs and fuel and maintenance in respect of assets, if such premises or assets are used wholly and exclusively for purposes of trade.

9. Independent contractor
An ‘independent contractor’ can only refer to a natural person.
The basic principle of the ‘independent-contractor’ rule is that an amount paid or payable for services rendered or to be rendered to a person in the course of a trade carried on by him/her independently of the person paying him/her and independently of the person to whom the services have been or are to be rendered, is not ‘remuneration’.
In this manner independent contractors are excluded from the employees’ tax system.
The independent contractor must register for provisional tax in respect amounts earned for services rendered independently, and will still be subject to normal tax at the relevant normal tax rates

10. Independent contractor
A person who is not ordinarily resident in the Republic cannot be classified as an independent contractor.
In terms of the statutory tests a person will be deemed not to carry on a trade independently if
the services are required to be performed mainly at the premises of the person by whom such amount is paid or payable or of the person to whom such services were or are to be rendered and
the person who rendered or will render the services is subject to the control or supervision of any other person as to the manner in which his duties are performed or are to be performed or as to his hours of work.
The net result will be the amount paid for services rendered will be “remuneration” and subject to PAYE

11. Independent contractor
“Bright line test”
A person will be deemed to be carrying on a trade independently if he throughout the year of assessment employs three or more employees who are on a full-time basis engaged in his business of rendering the services.
The term ‘employee’ for this purpose excludes any employee who is a connected person.
Common law test
Overall or “dominant impression” of the employment relationship must be formed
Dominant impression grid test
No one size fits all
See SARS Interpretation Note17

12. Independent contractor
Significance of distinguishing between employee and an independent contractor?
For the employer
The employer who becomes liable to pay an amount of remuneration to an employee must, unless the Commissioner has granted authority to the contrary, deduct or withhold from that amount the appropriate amount of employees’ tax and pay it over to the Commissioner.
An employer who fails to deduct or withhold the full amount of this employees’ tax will be personally liable for the payment to the Commissioner of the amount he failed to deduct or withhold, and must pay that amount to the Commissioner not later than the date on which payment of the tax should have been made if the tax had in fact been deducted or withheld.

13. Independent contractor
For the employee, s 23(m) prohibits the deduction of any expenditure, loss or allowance otherwise allowable relating to any employment in respect of which he derives remuneration other than
contributions to a pension, provident or retirement annuity fund in terms of s 11(k)
deductible allowances or expenses in terms of s 11(c) (legal expenses), s 11(e) (wear-and-tear and depreciation), s 11(i)(bad debts) or s 11(j) (doubtful debts);
and deductions under s 11(a)or (d) in respect of rent, cost of repairs or expenses in connection with a dwelling house or domestic premises to the extent that the deduction is not prohibited under s 23(b).

14. Independent contractor
Voluntary withholding of employees’ tax and the IRP5
Due to the potential penalties and interest that an employer might face should the correct amount of employees’ tax not be withheld, many taxpayers choose to withhold tax from payments to independent contractors as a precautionary measure.
The tax is often withheld at 25%.
Taxpayers in this situation must be careful to code the payment correctly on the IRP5 that is issued to the independent contractor.
The code 3616 (not 3601) must be used so that the independent contractor is not penalised is respect of the disallowance of expenses that the independent contractor may claim against income received from services rendered.

15. Labour Broker
A “labour broker” means any natural person who conducts or carries on any business with other persons to render a service or perform work for such client, or procures such other persons for the client, for which services or work such other persons are remunerated by such person.
Remuneration paid to a labour broker who is not in possession of an exemption certificate (IRP 30) is subject to employees’ tax.
The exemption certificate will only be issued if the labour broker carries on an independent business and certain other requirements are met.
See SARS Interpretation Note 35

16. VAT invoice
The words ‘tax invoice’ / VAT Invoice /Invoice – wef 8 January 2016
Name, address and VAT registration number of supplier
Name, address and VAT registration number of recipient
Invoice number & date
Description of the goods or services supplied
Quantity of the goods or services supplied
Either:
The value of the supply, VAT charged and consideration OR
Consideration paid, VAT amount/statement that VAT charged & rate
Abridged invoice consideration R50 but less than R5000
Full invoice consideration R5000 and over

17. Tax Clearance Certificate
SARS has recently introduced a new Tax Compliance Status (TCS) process which will enable taxpayer’s to see their tax compliance status at a glance.
Taxpayer will need to be on eFiling and to activate their TCS.
An important feature of the TCS is that the system will inform a taxpayer of the reason/s for non-compliance.
Once activated, TCS will stay active on the taxpayer’s eFiling profile.

18. Tax Clearance Certificate
Four boxes will be shown with each box either green (compliant) or red (non-compliant).
The boxes are:
registration status – a taxpayer will need to be registered and have an active status.
submission of returns – have all the taxpayer’s returns been submitted and are up to date?
debt – does the taxpayer owe SARS money without having made a payment arrangement with SARS?
relevant supporting documents – has the taxpayer been asked to supply data to SARS and ensured the information has been submitted?

19. Tax Clearance Certificate
Should a taxpayer not agree with their TCS, the taxpayer can query this on eFiling.
The query will be raised by clicking on the “Challenge Status” tab.
The taxpayer can also access drill-down information when the TCS of the taxpayer is red.
The drill down process will provide further detail on the areas of and reasons for the TCS reflecting as non-compliant (red) and what the taxpayer must rectify the non compliance in order for the TCS of the taxpayer to reflect as green.

20. Tax Clearance Certificate: Compliance verification
With the new TCS system, a taxpayer is now able to authorise any 3rd party to verify the compliance status of the taxpayer in one of two ways:
Through the use of an electronic access PIN, or
Through the use of a Tax Clearance Certificate obtained from the new TCS system

21. Tax Clearance Certificate: Compliance verification
The use of an electronic access PIN
The PIN can be used to verify the taxpayer’s compliance status,
online via SARS eFiling, or
at a SARS branch.
 When the PIN is used for verification, the result reflects the current tax compliance status at the date and time the PIN is used.
The compliance status will be colour-coded with a detailed description of what the status means.
Red – Tax affairs are not in order and the taxpayer is not tax compliant
Green – Tax affairs are in order and the taxpayer is tax compliant.

22. Tax Clearance Certificate: Compliance verification
Verification of the Tax Clearance Certificate (TCC) obtained from the new TCS system
The TCC can be verified, 
online via SARS eFiling,
via the SARS Contact Centre ( ), or
at a SARS branch.
 When the TCC is verified, the result reflects if the TCC is valid at the date and time it is checked.
The verification can be printed for recording purposes. The verification will also be stored electronically in “History” for future reference.
More information is available in the SARS “Guide to the Tax Compliance Status on eFiling”.

23. Deduction of expenses Section 11(a) General deduction formula
Most deductions are allowed by virtue of a so-called general deduction formula which comprises of the following elements:
The expenditure and losses
must be actually incurred
during the year of assessment
in the production of the income:
they must not constitute expenditure and losses of a capital nature, and
if they are claimed as a deduction against income derived from trade, they must, either in part or in full, constitute moneys that are laid out or expended for the purposes of trade.

24. ‘Actually incurred ’ The word ‘incurred’ does not merely mean ‘paid’.
The words ‘actually incurred’ rule out the deduction of provisions for expenditure or losses that are uncertain or may arise in the future or that are no more than impending or expected.
If there is no definite and absolute liability during the year of assessment to pay an amount, expenditure has not been ‘actually incurred’.
Estimates or contingent liabilities are not expenditure ‘actually incurred’.