[FAQ] The term “consultant” when assessing the S12E requirements

[FAQ] The term “consultant” when assessing the S12E requirements

• 16 April 2021
• Corporate Tax
• The Tax Faculty

This article is based on tax law for the year ending 28 February 2021.

Background

• Company C has one director who is the sole shareholder. There are no other full-time staff except contractors.
• Company C has two sources of income streams – one does recruitment of candidates for the placement at different clients while the other is consulting services around strategy definition and implementation/delivery as well as software design/configuration.
• Company C would either place a contractor in a role at the client’s business (whom the client would manage to get the work done) or the director or one of the contractors would perform the work for the client directly on an output basis.

Assuming all other aspects of the S12E requirements are met, would the above "personal service" exclude them from qualifying for the S12E deductions and reduced tax rates?

Answer

The Income Tax Act

We suspect your enquiry relates to the existence of the word “consulting” in the definition of “personal service”. If so, you don’t need to worry.

In 2012, ITC 1860 74 SATC 371 provided us with a very helpful decision on the meaning of “consulting”, which SARS did not take on appeal. The taxpayer in question advised clients on how best to display their products on supermarket shelves so as to attract the most attention from customers. She called herself a consultant, so SARS disqualified her company from being an SBC.

The court held that the term “consultant” meant the giving of “professional” advice. This would be done by a person with a professional qualification or licence. A person advising on product display on supermarket shelves does not need a professional qualification in order to carry out that function. It followed that the taxpayer was not carrying out the function of consulting as contemplated.

In the present matter, we would suggest that “services around strategy definition and implementation/delivery as well as software design/configuration” do not need a professional qualification or licence. Therefore, it must follow that, even though the client describes itself as “consulting”, this does not mean consulting as contemplated in the definition of “personal service”.

Should SARS challenge this ITC 1860 should assist you with the case.

Webinar Commentary

Further webinar commentary on Current Issues Facing Corporate Taxpayers 2021 can be accessed here.

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