Are you classified as a Personal Service Provider and if so, what are the consequences?

If you are not involved in manufacturing or retail your business may very well fall under the classification of a Personal Service Provider

Let’s first define a Personal Service.

Personal service means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial services broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if:

  • That service is performed personally by any shareholder or member of that company, co-operative or CC, or by a connected person to the shareholder or member; or
  • That company, co-operative or CC throughout the year of assessment employs less than three full-time employees. Theses full-time employees may not be shareholders or members of the entity, and may also not be a connected person to a shareholder or member

 So, what then is a Personal Service Provider (PSP)?

A Personal Service Provider (PSP) means any company (or trust), where:

  • Services are rendered personally by any person regarded as connected to the Company,
  • And such a person would be regarded an employee of the client
  • OR duties are performed mainly at the premises of the client AND subject to control or supervision by the client
  • OR where more than 80% of income is derived from a single client

except where such a company, throughout the year of assessment employs at least three or more full-time employees

So, what does it mean for you if you are classified as a PSP?

The main implications relate to tax and permissible deductions.

Tax

  • A PSP pays tax at a rate of 28%. (In the case of a trust the rate is 45%)
  • A PSP will have to withhold dividends tax on dividends distributed on behalf of shareholders
  • Because a PSP is included in the SARS definition of “employee”, any payments made to a PSP is subject to a rate of 28% which must be withheld by the client from such payments. These amounts may then be applied as credit when income tax liability of the PSP is calculated.

The permissible deductions of a PSP are limited to:

  • Employees salaries and contributions to any pension, provident or benefit fund deductible under section 11(l)
  • Legal costs deductible under section 11(c)
  • Irrecoverable debts deductible under section 11(i)
  • Refunds of salaries and restraint of trade payments under sections 11(nA) and 11(nB)
  • Expenses in respect of premises, finance charges, insurance, repairs, fuel and maintenance in respect of assets if such premises or assets are used wholly and exclusively for purposes of trade.

A PSP may also not qualify as a Small Business Corporation (SBC).