01 May 2007
Posted by: Author: Nolan Daniels
Since the inception of personal service companies, labour brokers have been thrust into the limelight. It appears that the South African Revenue Service (SARS) has become proactive and have decided to concentrate on ensuring that labour brokers are "towing the line”.The provisions of the Fourth Schedule to the Income Tax Act are quite specific and are clear as to the requirements that must be met for a labour broker to enjoy an exemption from employees’ tax.
A labour broker is an individual or an entity that procures labour for a reward.Generally, client A will approach the recruitment agency and enter into a formal written agreement with the labour broker to provide labour.It is important to note that client A does not pay the employees.The labour broker remunerates the employees.The contract of ten specifies the number of employees, the time period required, the nature of the work to be performed as well as the details of the payment for the labour procurement.Labour brokers are obliged to complete an IRP 30(a) form should they wish to be exempt from employees’ tax.
Once all the requirements have been satisfied, the SARS will issue the labour broker with an exemption certificate (IRP 30).Upon presentation of the certificate to a client, the client is absolved from deducting employees’ tax from any payments made to the labour broker.This is important for the labour broker as it will receive the full amount charged, which will aid its cash flow.
Should the labour broker not satisfy the requirements as stipulated in the Fourth Schedule, it will not be issued with an exemption certificate and the client is obliged to withhold employees’ tax from the amount due to the labour broker.In the case of an individual, employees’ tax must be deducted in accordance with the EMP 10 employees’ tax deduction tables.In the case of a company or a close corporation, tax must be deducted at a rate of 34%.This may have a crippling effect on the business’ cash flow.The client then becomes an agent for the SARS and is obliged to deduct and pay the employees’ tax to SARS.
The employees’ tax that has been withheld by the client is not lost to the labour broker.An IRP 5 certificate will be issued to the labour broker, who will include this with the income tax return and, upon assessment, may receive an employees’ tax credit.
There are a number of requirements which must be met before the SARS will issue an exemption certificate.Factors that would cause the request to fail include:
- Where more than 80% of the gross income of the labour broker consists of amounts received from one client and associated institutions.
- Where the labour broker provides its labour to another labour broker.
- Where the labour broker is contractually obliged to provide a specific employee to per form a specific job for the client.
The labour broker must apply on an annual basis for the exemption certificate.This must be done at least two months before the current exemption certificate expires.The 80% rule described above will not apply if the labour broker employs more than 3 unconnected full time employees.This means that the labour broker may be issued with an exemption certificate in this circumstance.
Source: By Nolan Daniels (TaxTALK)