The deduction of employees’ tax is dependent upon three elements being present. These elements are all defined in the Fourth Schedule to the Income Tax Act and include i) the presence of an employer, ii) an employee and iii) the payment of remuneration. No employees’ tax can be charged if one of these elements is not present. However, due to the misuse of concepts such as “independent contractor” and “service company” to try and circumvent these elements, the Income Tax Act contains specific provisions dealing with “personal service providers” and “labour brokers” in order to combat such possible instances of avoidance of PAYE and to limit the available deductions from income in the determination of taxable income for these entities (very few deductions are available against remuneration).
A labour broker is any natural person who carries on a business whereby he or she provides their clients with other persons (workers) to render a service or perform work for that client. It also includes services rendered in the form of procurement of workers for the client. (The workers are remunerated by the client and not the labour broker.)
Any payments made by a client to a labour broker is subject to employees’ tax at the rates applicable to individuals, unless the labour broker is in possession of a labour broker exemption certificate (IRP30A) for that specific tax year.
In order to qualify for this exemption certificate, the labour broker must carry on an independent trade and must be registered as a provisional taxpayer and as an employer for Pay-As-You-Earn purposes. Furthermore, the labour broker must be up to date with all relevant tax submissions. No certificate will be issued if the labour broker provides the services of another labour broker to any of its clients or if the labour broker is contractually obliged to provide a specified employee of the labour broker to the client. Also, if more than 80% of the gross income of the labour broker for the tax year is received from only one client. However, an exemption to the last-mentioned rule applies in instances where the labour broker employs three or more full-time employees throughout the tax year in the business of the labour broker and these employees are not connected persons in relation to the labour broker.
Labour brokers without an exemption certificate may only deduct the remuneration paid to employees as an expense for income tax purposes.
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A company, close corporation or trust that provides such services is not classified as a labour broker.
Labour brokers must apply for this exemption certificate annually as it is only valid for one tax year.
Section 23(k) of the Income Tax Act. The prohibition does not apply to labour brokers who do have an exemption certificate.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)