Does a personal service provider need to register for VAT?
06 May 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: Does a
personal service provider (which is a company) need to register for VAT or is it
deemed to be an employee for VAT purposes? The monthly remuneration of the PSP
is R500 000 and the personal service company does not charge a service fee.
My opinion is that as most of the income is actually remuneration,
the company should be exempt from registering for vat unless the service fees
charged exceed the threshold.
A: Before output
tax would have to be levied by the personal service provider, it would have to
carry on an ‘enterprise’ as defined in sec 1 of the Value-Added Tax Act (No. 89
of 1991) (hereinafter referred to as ‘the VAT Act’). However, Proviso (iii) to
the said definition states the following:
‘(aa) the rendering of services by an employee to his
employer in the course of his employment or the rendering of services by the
holder of any office in performing the duties of his office, shall not be
deemed to be the carrying on of an enterprise to the extent that any amount
constituting remuneration as contemplated in the definition of "remuneration”
in paragraph 1 of the Fourth Schedule to the Income Tax Act is paid or is
payable to such employee or office holder, as the case may be;
(aa) of this paragraph shall not apply in relation to any employment or office
accepted by any person in carrying on any enterprise carried on by him
independently of the employer or concern by whom the amount of remuneration is
paid or payable ...’ (own emphasis added).
Proviso (iii) therefore has the effect that services
rendered by an ‘employee’ to an ‘employer’ shall be excluded from the
definition of an enterprise to the extent that ‘remuneration’ is paid to the
The term ‘employee’ and ‘employer’ is not defined in the VAT
Act and one therefore needs to ascribe the common-law meaning thereto and need
to refrain from using the respective definitions thereof in the Fourth Schedule
to the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’). The
remuneration paid to the personal service provider will fall within the ambit
of the definition of ‘remuneration’ in par 1 of the Fourth Schedule to the Act.
It however does not mean that one is dealing with an ‘employee’ and an
‘employer’ as envisaged in proviso (iii)(aa) to the VAT Act.
The determination of whether one is dealing with an employee
and an employer from a common-law perspective is fact specific and the
different contracts entered into by the company would have to be
investigated. The effect of proviso
(iii)(bb) (of the definition of enterprise in section 1(1) of the VAT Act) is
that a person who is merely as a result of these two statutory indicators deemed not to be an independent contractor
(the Income Tax Act definition of remuneration), but who is - in accordance
with the common-law dominant impression test - in fact an independent
contractor, is regarded as carrying on an enterprise for VAT purposes.
From the facts provided, it would seem as if the personal
service provider would classify as an ‘employee’ and even though PAYE is
deducted from the amounts paid to it, it would may still be liable for
registration as a vendor and to levy output tax on the remuneration received by
it. The amounts received by the company in respect of services rendered would
constitute consideration and the company would have to levy output tax if the
company is registered (or must be) as a vendor.
The payments made by the client(s) to the personal service
provider may be subject to both VAT and PAYE, provided that all the other
requirements of the VAT Act are met. Therefore, the amounts received by the
company from its clients are both consideration for the supply of services and
remuneration, subject to employees’ tax, as envisaged in the Fourth
Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.