After my recent article regarding contractors, labour brokers and the need to deduct employees' tax, I received an e-mail addressing a further question of which contractors should be aware value added tax (VAT).
VAT legislation requires that you, or your company or close corporation (CC), register for VAT if the VATable turnover of the business exceeds R150 000.
Specifically excluded from this requirement is income that is received by an employee as a consequence of services rendered to the employer, which falls into the definition of remuneration, in terms of the income tax legislation. However, this exclusion does not apply in relation to any employment or office accepted by any person in carrying on any enterprise independently from the employer.
The term "independent" in this context is not as narrow as the term which is defined in the tax legislation.
The consequence is, therefore, that you, your company or CC, may be carrying on the business of a labour broker or a contractor, and because of the requirements of the tax legislation, the person with whom you are contracting will need to deduct employees' tax. But, because you are considered to be independent from the person with whom you are contracting in normal terms, you will also be required to register for VAT purposes and will need to add VAT to the fees you charge your contractor.
Provided the entity with whom you are contracting is registered as a vendor for VAT purposes, that entity will be able to claim the VAT you charge to it as an input tax deduction, or a refund, when it submits its VAT return.
If you are a labour broker, you can apply for a labour broker exemption certificate, in respect of employees' tax payable. Alternatively, remember that the employees' tax is deducted from fees paid to you, your company or CC, which can be set off against income tax (and provisional payments) that you, your company or CC, will need to make in the future.
If you believe that, due to various deductions you, your company or CC qualify for, the final tax payable will be less than the employees' tax deducted, you may apply for a directive entitling the entity with whom you are contracting to deduct less than the tax it is required to deduct in terms of the tables, or 30 percent (company or CC). If you do not obtain such a directive, the South African Revenue Services will be obliged to refund any overpaid tax to you when it assesses you, following submission of the tax return.
The other aspect that seems to cause confusion, relates to the labour laws. As I mentioned in my previous article, and as is emphasised above, the definition of independence in the income tax legislation, as it relates to employees' tax, is very specific. It requires that the contracting party is not under the supervision and control of the "employer" (ie your client) as to hours of work and the way in which the work is performed, and that the contracting party is not entitled to regular payment on a monthly, weekly, daily or other specific interval.
However, although it may influence the decision, because these criteria are so specific to the income tax legislation, the fact that employees' tax is required to be deducted from the payments made to you (assuming you do not have an exemption certificate), as a contractor, does not necessarily mean that you are an employee for labour law purposes, or that you are entitled to protection from the labour courts, if there is a dispute relating to your contract.
The moral of the story is: be aware of the implications of the contract you are entering into, and be especially aware that you are complying with all the necessary laws that the contract may impose on you.