Can an independent contractor apply for a fixed percentage tax directive (IRP3b) and if so, which option would be used, SARS only allows commission, Employment company and personal services. Our client is in a situation where they only have independent co
Important:
This answer is based on tax law year ending 28 February 2017.
Answer:
We agree with your view that, if the person rendering the services carries on a trade independently, no employees tax will apply – the amount payable is simply not remuneration.
In terms of the current practice generally prevailing (issue 4), it “is the responsibility of the employer to determine whether the provisions of exclusionary subparagraph (ii) of the definition of “remuneration” are applicable and whether payments are subject to employees’ tax.” It is SARS’s view that the employer “is in the best position to evaluate the facts and the actual situation”. The ‘employer’ in this instance would be the person paying the ‘contractors’.
We submit that the employer must retain some supporting documents to be able to prove this, if it is queried by SARS – see the practice generally prevailing. The affidavit or solemn declaration – see paragraph 2(1A) of the Fourth Schedule – will suffice for a of 'personal service provider’ (a company or a trust). But it is not to confirm that the company or trust is independent.
The legal relationship between the parties must therefore be gathered from the terms of the (written) agreement between them. The general principle was explained as follows by Judge Streicher in the Niselow case. The Judge said that "… an employee is a person who makes over his or her capacity to produce to another; an independent contractor, by contrast, is a person whose commitment is to the production of a given result by his or her labour…" The judge then concluded by saying that the relationship between the parties must remain one in terms of which the person doing the work undertook to produce a certain result and not to render personal services to person paying for it to be a contract in terms of which independent services are rendered.
The Guide for employers in respect of employees’ tax, issued by SARS in respect of the 2020 year of assessment, states that the “employees’ tax for an independent contractor” must be “calculated according to the deduction tables or a tax directive”.
In terms of paragraph 11, of the Fourth Schedule to the Income Tax Act, SARS may, having regard to the circumstances of the case, issue a directive to an employer authorising that employer … to deduct or withhold by way of employees' tax from any remuneration in terms of paragraph 2, a specified amount or an amount to be determined in accordance with a specified rate or scale. SARS can however only issue a directive:
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in order to alleviate hardship to that employee due to circumstances outside the control of the employee
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or to correct any error in regard to the calculation of employees' tax,
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or in the case of remuneration constituting commission
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or where the remuneration is paid or payable to a personal service provider
and that directive must be complied with.
This doesn’t include an independent contractor – so a directive can’t be applied for unless there is hardship (unlikely). We are not sure why SARS say they will issue a directive in this instance, but it appears that they will entertain an application.