A personal service provider (PSP) is a company or trust where the owner of the business renders service in his or her personal capacity using the business as a vehicle. According to the tax act, a personal service provider refers to a company which offers particular services and in reality it is the person providing the services who represents the company. This is according to the Fourth Schedule of the Income Tax Act 58 of 1962.
Any company, close corporation or trust that meets the definition of “personal service provider” and is in receipt of “remuneration” as defined in paragraph 1 is subject to the deduction or withholding of employees’ tax.
In determining whether a company, close corporation or trust is a “personal service provider” and whether employees’ tax must be deducted or withheld from amounts paid or payable to them, the following tests should be performed:
a) Determine whether some or all of the receipts of the company, close corporation or trust consist of “remuneration”
If the receipts do not include “remuneration” as defined, no employees’ tax is deductible. The definition of “remuneration” excludes payments made to independent contractors who are natural persons or trusts. The exclusion does not apply to a personal service provider.
There is no need, as a result, to determine whether the personal service provider is an “independent contractor” for purposes of the Fourth Schedule to the Act. If remuneration is paid or payable, then proceed to the next test.
b) Determine whether the service is rendered personally by any person who is a connected person in relation to the company, close corporation or trust
The term “connected person” is defined in section 1(1) and must be applied accordingly. The word “service” includes the provisions of a person to render a service or work for a client (including, for example, companies, close corporations and trusts operating as labour brokers).
If the service is rendered personally by any person who is a connected person in relation to the company, close corporation or trust, then proceed to the next test below.
If this is not the case, the company, close corporation or trust is not a “personal service provider”, and it is not subject to the deduction or withholding of employees’ tax.
c) Determine whether the company, close corporation or trust employs (or is likely to employ) three or more full-time employees throughout the particular year of assessment who are, on a full-time basis, engaged in the business of rendering the service, and who are not holders of shares or members of the company or close corporation, nor settlors or beneficiaries of a trust, nor connected persons in relation to such persons
Determine whether the company, close corporation or trust employs (or is likely to employ) three or more full-time employees throughout the particular year of assessment who are, on a full-time basis, engaged in the business of rendering the service, and who are not holders of shares or members of the company or close corporation, nor settlors or beneficiaries of a trust, nor connected persons in relation to such persons
NB: If this test is satisfied, the company, close corporation or trust is not a personal service provider. If this test is not satisfied, then proceed to the next test below.
d) Determine whether one (or more) of the following is true:
- Would the person who is personally rendering the service have been regarded as an “employee” of the client if the service was rendered directly to the client and not through the company, close corporation or trust?
For purposes of employees’ tax, it is necessary to determine whether the person would have been an “employee” as defined. For example, if the person would have been a person in receipt of remuneration or to whom remuneration accrues as described in paragraph (a) of the definition of an “employee”, the company, close corporation or trust is a “personal service provider”.
Following the example through, the test must also include a reference to the definition of the term “remuneration” (because of the reference in paragraph (a) to the definition of “employee”), that excludes payments made to common law independent contractors.
If the person rendering the service would have been regarded as an independent contractor under common law, then the person would not have been regarded as an “employee” in the absence of the company, close corporation or trust.
- Must the person who is personally rendering the service, or the company, close corporation or trust, perform the duties mainly at the premises of the client, and if so, is that person subject to the control or supervision of the client as to the manner in which the duties are performed or are to be performed?
The test is the same as the one used in exclusionary paragraph (ii) of the definition of “remuneration”. If the services are rendered mainly at the premises of the client and the client supervises or controls the activities of the person rendering the service or the activities of the company, close corporation or trust, then the test is positive.
- Does more than 80% of the income of the company, close corporation or trust from services rendered consist (or likely to consist) of amounts received from any one client, or from any associated institution in relation to the client?
If more than 80% of the income of the company, close corporation or trust consists (or is likely to consist) of income from only one client, the test is positive.
In instances when the first two tests in (d) above do not apply and a company, close corporation or trust provides a client with an affidavit or solemn declaration stating that it will not derive more than 80% of its income from one client, the client may rely on the affidavit or solemn declaration, provided the client relies on it in good faith.
If it later emerges that the company, close corporation or trust is, in fact, a personal service provider, then employees’ tax will not be recoverable from the client.
However, the prohibition of deductions under section 23(k) will apply as far as that personal service provider is concerned. Personal service providers, as all other companies and close corporations, pay tax on taxable income at the rate of 28% and trusts at a rate of 45%.
Additional considerations
A personal service provider does not qualify as a “small business corporation” and will thus not qualify for the lower tax rates applicable to small business corporations. Both a personal service provider and a labour broker without a certificate of exemption do not qualify as a micro business for the purposes of turnover tax payable by micro businesses.
