Tax law relating to Personal Service Provider Companies
Many people continue to believe that it is better to provide their personal services, typically consulting, through a company rather than as individuals. Not so.
A Personal Service Company is one which provides services such as consulting, bookkeeping, designing etc which are actually services provided by a person rather than product supplied or non personal services, such as rental property. In order for it to be classified as a Personal Service Company a number of tests are applied. You can research more deeply if you are unsure whether these tests are satisfied in your case or not.
Remuneration. Does it receive remuneration for the services rendered? If so apply the next test.
Services. Are the services provided personally by a person or persons who are connected persons in relation to the company (e.g. shareholders or relations of shareholders)? If so proceed to the next test.
Employee. If it were not for the company, would the person normally be considered to be an employee of the customer? If so, proceed to the next test.
Employees. Does the company employ less than three independent full time employees directly in the business of rendering the service?
If all of the above are satisfied, then the company is a Personal Services Company.
This has three ramifications for tax purposes –
1) The company cannot be classified as a Small Business Corporation and loses the opportunity to save up to R95 000 in tax each year.
2) The customer must deduct PAYE at the rate of 27% from all remuneration as if the company was, in fact, an employee. This PAYE is deducted from the tax liability of the company as if it were a Provisional Tax payment.
3) If provided with an Affidavit to the effect that the company is not a Personal Services Company as defined, then the customer does not have to deduct PAYE.
4) No expenses may be deducted except salaries, legal costs, bad debts, retirement funding for its employees and also premises, finance charges, interest, maintenance if used entirely for the business and for no other purpose.
The Personal Services Company must deduct PAYE from its employee(s) when paying salaries.
Don’t go there! What you should rather do is either sell your services as a sole trader and advise your client that he should deduct PAYE or, have your client put you on the payroll.
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Hi Morne,
Are cost of sale expenses related to the core service of a PSP tax deductible?
I have a PSP which renders creative & marketing services to a client. My client requested that I deliver some PR services to them. I do not internally have the capacity to do PR and so I sub-contracted this piece of work to an external company
Is that expense tax deductible? My account says those expenses are not deductible? I’m aware that very few expenses are deductible for PSP’s but I’m confused as to how this is not. It was an expense essential for the service without which I could not deliver the service to my client.
Hi Jan,
On the face of it I would have said that your accountant is correct, but I don’t think he/she has fully thought it through.
This supply is not of a personal service. It’s the same as if your company bought something like a computer, marked it up and sold it. So, in my view, it falls outside of the perview of a PSP and is deductible.
Hi. I just started my own consultancy where I am the only shareholder and, at this stage, the only employee. Will my company be classified as a PSP if I also sell products such as training courses?
Hi Bert,
It seems to me that your company does not pass the third test:
“Employee. If it were not for the company, would the person normally be considered to be an employee of the customer? If so, proceed to the next test.”
In which case it is not a PSP.
In any event, I would expect that if the supplies exceed 20% of the turnover, it would also not be a PSP, but in view of the above test, I don’t think that is relevant. I have not researched this response fully and am not a tax specialist. However, there’s plenty of SARS documentation on the matter.
Does a boarding kennel facility for animals count as a personal service company? This is not petsitting. The animals are boarded away from the client’s home.
Hi Claudia,
The short answer is “No”.
The reason is that not 80% of your income comes from one customer.
Thanks so much. Do you mind sharing the “long answer”? Is there more I need to know?
Hi Claudia,
The long answer is in the article that you commented on.
Employee. If it were not for the company, would the person normally be considered to be an employee of the customer? If so, proceed to the next test.
Your answer to this is “No” therefore you do not have to proceedd to the next test. The 80% rule is often appliedd to this question.
Hi there, I was on contract basis as an employee but instead of extending (for the 3rd time) they put me on rather as an external contractor or Personal Service Provide. I was to invoice them for services rendered and get paid based on the invoice but instead was paid on the same day as salaries are paid and normal PAYE was deducted and I received a salary slip and disregarded my invoice. They withhold tax – my impression was that I register for Provisional tax and they cannot withhold tax. What is your take on this?
My apologies for the late response. I have been hospitalised.
They were correct to deduct PAYE, but it should have been at the company tax rate, not yours. Your company then pays you and deducts PAYE in the normal way. The PAYE that they deducted is treated as a tax payment against the company profits, so there’s no double taxation.
Is a staff recruitment company with only the director working regarded as a personal service company and therefor cannot qualify for turnover tax?
On the assumption that you have no one client providing 80% or more of your business, yours would almost certainly not be a personal services company.
Read SARS Interpretation Note 35 (Issue 5) for the full test.
But why turnover tax? It would almost certainly be better as a Small Business Corporation. The first R95 750 profit is free of tax and the next tranche is taxed at 7% up to R365 000 profit.
Perhaps you would like to have a chat with me? https://harbourassociates.youcanbook.me/
What is the rate that the tax needs to be withheld?
I would imagine the easiest practical way is to put the company on payroll?
Hi Ilze,
The company’s clients must deduct tax at 28% (soon to be 27%) and this is treated as provisional tax paid by the company.
The company must deduct PAYE from its employees at the normal rates, so the company must be registered as an employer.
In others the full installment can not be claimed when a vehicle is purchased, only the interest paid?
Hi Morne,
Yes. Capital repayments of any kind are not in the production of income and are not tax deductible. If the purchaser is a normal company, then interest and wear and tear allowance are deductible. I’m not speaking here of personal service companies or providers, because these cannot deduct either.
Even when it’s a normal company, it is usually better to pay yourself a travel allowance and deduct permitted travel expenses from your taxable income. You need to keep a log book and the deduction is limited to the total of the travel allowance received.