Employers Beware: SARS To Intensify Scrutiny
27 August 2010
Posted by: Author: Mansoor Parker
Employers Beware: SARS To Intensify Scrutiny
Employers should not lose sight of the problem of the misclassification of workers as independent contractors
In February this year, Finance Minister Pravin Gordhan announced that government will take steps to reduce tax avoidance and tax structuring by tightening company car and other fringe benefit rules, and through measures to ensure that employer deductions are fully reflected in the gross income of employees.
While the 2010 Budget Speech focused on fringe benefits,employers should not lose sight of the problem of the misclassification of worker s as independent contractors. A few observations on this important area are highlighted before dealing with the subject matter of the Minister's Budget Speech.
The cost of an employee/independent contractor misclassification can be severe.Inaccurate categorisation of an employee as an independent contractor exposes employers to liability for employees' tax and unanticipated coverage by labour laws.Employers are well advised to review all workers currently classified as independent contractors and either reclassify those who are clearly employees and restructure the remaining relationships to satisfy as many of the factors indicating independent contractor status as possible.
The Budget Speech focussed on issues such as payments to or on behalf of employees outside the payroll system, and other fringe benefits with a specific reference on company cars. But this is not the only form of fringe benefit.There are many benefits provided by companies to their employees,and the SARS goal is to ensure that these benefits are included in the relevant PAYE forms and properly taxed.
Although the general rule is that fringe benefits are taxable for employees, income tax law provides a number of exceptions to that general rule—so long as the benefits conform with certain standards and documentation requirements.
These requirements vary for different types of fringe benefits. If the fringe benefits do not meet these requirements, the nonconforming fringe benefits may be considered remuneration that are subject to employment taxes.There are several categories of fringe benefits, each containing its own rules for the application of the particular fringe benefit. Faced with the varying nature of these tests, it is unwise to assume that what has worked before will work again, or that what has worked for one category of fringe benefit will work for a different category of fringe benefit.
Businesses should not be reactive to tax risks in this area.Simply because a business has not previously received a query from SARS, does not mean that those areas where companies have taken a particular position on fringe benefits have been accepted by SARS.These situations are fact-specific, and facts change overtime.
Although there are no guaranteed ways to avoid being targeted, there are certain measures business can take to decrease risk.Businesses should review their current fringe benefits and employment tax compliance practices, specifically focusing on the areas identified in the Minister's Budget Speech. The business should identify the fringe benefits applicable to its operations, identify the risks associated with those fringe benefits, implement appropriate controls and audit these to ensure compliance.
A review of all employee related plans and practices will increase the probability of employers finding most, if not all,discrepancies, thereby reducing the company's potential exposure in a SARS audit. By doing so, a company will be able to protect its tax positions in the event of a SARS audit, and take necessary corrective actions for past practices.Businesses may also wish to engage a tax professional to conduct a simulated audit for the purpose of reviewing record keeping policies and existing tax positions, and obtaining advice on correcting problems or deficiencies that would be likely targets in the event of an actual SARS audit.
Such a simulated audit will yield valuable information on how to measure a company's employment tax audit risk.SARS auditors typically have experience of auditing various companies,whereas companies' internal personnel may not have similar experience.In this regard, a seasoned tax professional will help balance the position between SARS and the company.
In the event that your business is selected for examination by SARS,good management practices ought to be followed. It should be remembered that, at a future date,the new Tax Administration Bill will be passed into law, which will provide SARS with greater powers than is presently the case. Good tax risk management will therefore demand that within the business there is a clear "chain of command”, preferably with outside tax counsel assistance for responding to SARS notices and communications.
Requests may be made for various documents, including,fringe benefits manuals or handbooks used by companies, as well as minutes of internal board sub-committee or management meetings. Companies should maintain control over the SARS audit process by requesting further time to reply to information and documentation requests, or tailoring the scope of information requested,where suitable.
Source: By Mansoor Parker (Tax breaks)