WHEN DOES A PERSONAL SERVICE PROVIDER QUALIFY AS A SMALL BUSINESS COMPANY?

fhbc_feb_nuusbrief_01_17First things first 

In general, the typical personal service provider (henceforth referred to as “PSP”) as defined in the Fourth Schedule of the Income Tax Act 58 of 1962, is prohibited from qualifying as a small business company (hereafter referred to as “SBC”) in terms of section 12E(4)(a)(iv) of the Income Tax Act.

What qualifies as a personal service (Section 12E(4)(d))? 

“personal service”, in relation to a company, co-operative or close corporation, means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsman ship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if—
  • that service is performed personally by any person who holds an interest in that company, co-operative or close corporation or by any person that is a connected person in relation to any person holding such an interest; and
 

  • that company, co-operative or close corporation does not throughout the year of assessment employ three or more full-time employees (other than any employee who is a holder of a share in the company or a member of the co-operative or close corporation, as the case may be, or who is a connected person in relation to a holder of a share in the company or a member), who are on a full-time basis engaged in the business of that company, co-operative or close corporation of rendering that service.

 

What qualifies as a personal service provider? 

Section 12E(4)(a)(iv) excludes a company which is a “personal service provider” as defined in paragraph 1 of the Fourth Schedule from qualifying as an SBC.

A “personal service provider” is defined in the Fourth Schedule as such if the services were rendered personally by a connected person in relation to the company to a client and –

  • the connected person would be regarded as an employee of the client, if the person had rendered the service directly to the client; or
  • the services must be performed mainly at the client’s premises, and such employee is perhaps working under the supervision of the client; or
  • more than 80% of the income of the company, during the year of assessment has been derived (or is likely to be derived) from any one client.

The exception 

The real question in this regard is whether a PSP may qualify for the SBC tax benefits?  Having a look at the simple answer in this regard, a PSP will qualify as a SBC, if the PSP employs three or more full-time employees, who are engaged on a full-time basis in the business of such company of rendering any such service, other than any employee who is a holder of a share in the company or settlor or beneficiary of the trust or is a connected person in relation to such person.

In other words, the PSP may qualify as a SBC if: 

  • The PSP has three or more full-time employees,
  • who does not hold any shares in the company, and
  • who also is not connected to a holder of a share in that company.

Moreover, the employee described above does not need to perform an activity that directly generates income for the particular company.  For example – an accounting firm’s receptionist, whom is employed by the PSP on a full-time basis, but does not directly work with clients by rendering accounting work, still falls within the ambit of this exception and may be included in the “three or more full-time employee count”.

The next question might be “what qualifies as a full-time employee”?  A full-time employee may be seen as an employee:

  • who’s whole available working time is being used by an employer, in other words someone who is working the standard working hours which is regarded as normal working hours (normal working hours as in terms of the Labour Relations Act 66 of 1995),
  • who is not an independent contractor or someone who works under a mandate, where there is not an employer-employee relationship.

Lastly, as the above guidelines may look like an easy way into the shoes of a small business company, keep in mind that each case must be evaluated in accordance with the facts and circumstances in the particular case.  Also, before making use of the taxation rules for SBC’s regarding your personal service company or in relation to the personal service(s) you are rendering – consult with your financial or business advisor to ensure that you indeed fall within the scope therefor.

If you have any enquiries, please contact Chantél van der Merwe at c.vandermerwe@fhbc.co.za

Source Reference:

Income Tax Act Nr 58 of 1962
SAIPA TAX GUIDE 2019/2020
SARS INTERPRETATION NOTE: NO. 9 (Issue 6): SMALL BUSINESS CORPORATIONS