I have a client who is an electrician by trade who works through his company. In my view he is a Personal Service Provider as defined in the Fourth Schedule. He is querying me as his previous accountant advised that he falls under a SBC as defined in s12E
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
For purposes of the guidance that follows we accept that the only concern, in determining whether or not the entity qualifies as a small business corporation (see section 12E(4)) relates to the requirement in section 12E(4)(a)(iii) – “... not more than 20% of the total receipts and accruals ... consists ... of ... income from the rendering of a personal service ...”
That specifically includes that the “company is not a personal service provider as defined in the Fourth Schedule”.
We noted that you made no reference to the fact that any one of the companies “does not throughout the year of assessment employ three or more full-time employees”.
For purposes of the Fourth Schedule a 'personal service provider' means any company …, where any service rendered on behalf of such company … to a client of such company or trust is rendered personally by any person who is a connected person in relation to such company …, and-
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such person would be regarded as an employee of such client if such service was rendered by such person directly to such client, other than on behalf of such company …; or
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where those duties must be performed mainly at the premises of the client, such person or such company … is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service; or
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where more than 80 per cent of the income of such company … during the year of assessment, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of such company …, in relation to such client …
It is clear that the individual, as the holder of shares in the company (and probably more than 20% thereof) personally renders the service. The company will only be a personal service provider if one of (a), (b) or (c) applies. We are not sure which of one the other circumstances, in your view, applies.
It is unlikely that the electrician, that appears to act independently, would be regarded to be an employee. We agree that the services are rendered at the premises of the clients, but we don’t believe that the electrician is subject to the control or supervision of such client as to the manner in which the duties are performed or are to be performed in rendering such service.
Of course, if the services are rendered to a single client and the value thereof exceeds the 80% of income, the company would be a personal service provider.
You may be of the opinion that the company derives its gross income form the rendering of a personal service. The relevant part in this regard is “... “personal service”, in relation to a company … means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if—
(i) 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 ...”
It is clear from the Act (section 12E of the Income Tax Act – not the SARS Act) that “personal service” is a defined term (copied above), but that the services used in the definition are not defined themselves.
SARS states the following in Interpretation Note: No. 9 (Issue 7):
“In general, a personal service refers to a service rendered for which the income derived is mainly a reward for the personal efforts or skills of an individual. In determining whether a service falls within the ambit of a “personal service” as defined, the ordinary grammatical meaning is given to each word in that definition. The words “any service in the field of” preceding the categories of services listed in the definition suggest that a wide interpretation must be applied to these categories. Therefore, the list must be interpreted to include every service in the specified field irrespective of whether it is of a professional nature.”
I agree that the words ‘in the field of’ widens or expands the meaning of ‘personal service’, but we are not sure why you believe that the service of an electrician is included in the meaning of any of the specific ones mentioned in the Act.