What is a PSP:
A personal service provider is a company or trust whereby the owner of a business renders a service in their personal capacity using the company/trust as a channel. This means that the services of the company/trust are personally rendered by any person regarded as being connected to the PSP.
It is like a sole trader, with the exception that a PSP is restricted to being a company or a trust. Thus, a partnership or a natural person will not fall under the scope of a PSP.
The company/trust, (or close corporation) does not throughout the year of assessment employ three or more full-time employees. These 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.
Implications of being a PSP:
A company PSP pays tax at the usual rate of 28% and will qualify as a provisional taxpayer. Personal service providers who are companies will in addition pay dividends tax on any dividends declared. A PSP cannot qualify as a Small Business Corporation.
SARS has ruled that a person cannot be employed by themselves since the company has just a single employee and as such under these circumstances a PSP is treated as an employee for tax purposes. And the income received from the client will be deemed as remuneration.
Therefore, when payments are made to a personal service provider, employees tax at 28% must be withheld by the client of the PSP unless there is a directive for a lower tax rate provided. The employees tax paid may be set off against the tax liability of the PSP at the end of the year.
In the case of a trust that is classified as a PSP, the tax rate is 45% of taxable income. Remuneration paid to a trust which is a personal service provider is paid after employees tax of 45% unless there is a directive for a lower tax rate provided.
Allowable expenses available to a personal service provider:
Section 23(k) of the Income Tax Act limits the permissible tax deductions of a personal service provider to the following:
- Expenses in respect of premises – such as rental, finance charges, insurance, repairs and maintenance and petrol in respect of assets, only if wholly and exclusively for the purposes of trade.
- Legal costs
- Irrecoverable debts
- An amount paid or payable to any employee of the personal service provider for services rendered by such employee
- Contributions made by the employer (PSP) for the benefit of employees to any pension fund, provident fund, or benefit fund
- Refunds of salary and the restraint of trade payments
It should be noted that personal service providers are not permitted to deduct capital allowances such as wear and tear.
The test questions to establish whether a company or trust qualifies as a PSP:
1. Who renders the services?
The services are provided, indirectly or directly, by the connected persons, on behalf of the company, or
2. Where are the services rendered?
The service or duties are performed mainly at the premises of the client, such a company, or trust is subject to the control or supervision of the client in terms of the manner in which the duties are to be performed or the manner in which the services are rendered, or
3. The make-up of the income earned?
More than 80% of the income of the company or trust during the year of assessment, results from services rendered, and consist of amounts received directly or indirectly from any one client of the company or trust.
The taxpayer must meet just one of the abovementioned criteria in order to be classified as a PSP.