Independent Subcontractors and PAYE.
The Building Industries Federation of South Africa has a standard contract for subcontracts. This standard contract contains the following clauses:
The contractor shall pay to the subcontractor the sum or sums and at the interval agreed upon for work properly done. When payments are made periodically the amount shall be determined by the contractor, in agreement with the subcontractor, and shall the based on a fair and reasonable valuation of the work completed.
Once the materials for the work have been handed to the subcontractor he shall be responsible for the proper handling and use thereof and shall be responsible for the cost of replacement due to waste beyond the allow stated in the should.
If a subcontractor has signed the standard agreement he is supposed to be an independent person for the purpose of income tax. Should the subcontractor be challenged by SARS on the bases that he/she is subject to PAYE, the following argument may be used. For the purpose of this article assume that the name of the taxpayer is Joseph and that the contractor is called XYZ:
The issue is whether the taxpayer, Joseph, was a genuine independent contractor whose remuneration did not attract PAYE or whether he was a disguised ordinary employee whose remuneration attracted PAYE.
In order to succeed the taxpayer has to show on a balance of probabilities that as subcontractor he was involved in the activities of XYZ, the contractor, quite independently of the contractors control and supervision and that he conducted his own autonomous trade anchored on two cornerstones, namely:
He has to show that he conducted his business quite independently and not subject to the ‘superior whims and dictates of the mandatory often expressed in the statutory phrase control and supervision vide the first inclusionary proviso (aa) in respect of the definition of the word remuneration in paragraph 2(1) of the Fourth Schedule2.
The amounts paid by the contractor in respect of subcontract work was no fixed remuneration payable at any regular intervals for example daily, weekly, fortnightly, monthly or any other periodic interval vide the second inclusionary proviso (bb) in the definition of the word remuneration in paragraph 2(1) of the Fourth Schedule.
Assumed facts relating to the business activities of Joseph:
He was employed as an independent labour-only subcontractor XYZ. He entered into a contract with the contractor that is based on a contract drawn up by the Building Industries Federation of South Africa. It is important to note that the contract was entered into purely for economic reasons and not with the intention to avoid paying tax3. We wish to refer you to the following specific clauses of this contract:
1.Preamble: The sub contractor shall fully familiarise himself with the requirements of the specifications for the work and shall with due skill and diligence and in a proper workmanlike manner carry out and complete the subcontract work as described in the schedule in accordance with the instructions and to the reasonable satisfaction of the contractor and subject to further terms and conditions.
2.Paragraph 1.1: The contractor shall pay to the subcontractor the sum or sums and at intervals stated in the schedule for work properly done. When payments are to be made periodically, the amount shall be determined by the contractor, in agreement with the subcontractor and shall be based on a fair and reasonable valuation of the work completed.
3.Paragraph 1.2: The contractor may deduct the amount of any proven liability which the contractor may incur by reason of the subcontractor’s failure to comply with his obligations contained herein from any sums that are due or may become due to the subcontractor.
4.Paragraph 2.1: The subcontractor shall perform the work in the manner determined by the contractor and in accordance with a programme compiled by the contractor.
5.Paragraph 2.3: Once the materials for the work have been handed to the subcontractor he shall be responsible for the proper handling and use thereof and shall be responsible for the cost of replacement due to waste beyond the allowance stated in the schedule.
6.Paragraph 6: The subcontractor shall immediately after being notified, make good at his own expense any defects in his workmanship or materials which are notified to him not later than 28 days after the completion of the portion of the work containing the defects.
7.The subcontractor was not prohibited from taking on other subcontract work with other contractors.
Supervision or control
Rampai J, in ITC 17674, dealt with the position of an ordinary employee in the situation of master and servant from a common-law perspective and the position of an independent contractor. The following objective factors indicate clearly that the above taxpayer was an independent person during the 2007 tax year and not a typical ordinary worker who would have been under the contractual obligation to serve his employer and him alone:
The subcontractor did not surrender his productive capacity to the contractor. Had he not produced he would not have been entitled to claim a fee. He was not subject to the superior whims and dictates of the contractor, referred to in proviso (aa) of paragraph 2(1) of the Fourth Schedule as control and supervision.
The manner in which the subcontractor executed his mandate was characterised by a great measure of independence or degree of freedom. He was, for example, not restricted to mandatory hours of work.
The subcontractor was not exclusively tied to the contractor. His agreement with the contractor did not prohibit him from undertaking more than one assignment at a time.
The subcontractor’s mandate was from one job to the other and did not amount to a long-term relationship with the contractor. If his work were unsatisfactory the contractor would not have awarded further jobs to him. In other words the contractor could have dispensed with his services at any time in spite of the provisions of labour law legislation at the time.
In terms of his contract the subcontractor had to deliver a fine finished product chiselled and shaped by independent use of unbridled or free productive capacity5. His contract with the contractor stated in clear terms that he would have been at financial risk with regard to any defective work.
Earnings paid at regular intervals
The subcontractor was paid on a progress basis. Measurements of performance were made before each payment. In other words, if no work were done the subcontractor would not have been paid at all. It did occur on occasion that he was not paid at all. The amount that was paid to the subcontractor varied from time to time and was entirely dependent on the work completed during a period to the satisfaction of the contractor.
Although the subcontractor was remunerated more or less every week, such payments that were certainly not fixed did not offend the tax rule against regular remuneration for independent contractors. In other words, such varied payments did not have an adverse impact on the entrepreneurial autonomy of the subcontractor as an independent contractor.
The bottom line is that the subcontractor was entitled to be paid for work completed on a job which work could have been completed at any irregular intervals during any period of a week, month or longer.6
On 18 March 2005 the Master Builders Association advised its members: As you are aware, SARS issued a tax directive in July 2004 which prescribes PAYE deductions of 10% from payments made to labour-only subcontractors. Following further discussions with SARS the rate of PAYE deduction has been reduced to 6% as from 1 March 2005. The circular then continues to advise that members are required to deduct 7% from payments to labour-only subcontractors, being 1% in respect of UIF contribution and a 1% in respect of skills development levy. Payments to SARS should thus be 9% of the gross payment to the labour-only subcontractor. The contractor complied with this instruction and duly remitted these deductions in respect of the above taxpayer to SARS.
It is important to note that the main reason why the contractor entered into contracts with subcontractors like the above taxpayer in the 2007 tax year was to minimise its running costs and thereby to improve its bottom line. The arrangement was entered into purely for economic reasons and not with the intention to avoid paying tax.
‘Rampai J SATC 1767 had the following approach: although the appellant had remunerated two marketing agents – – – every month during part of the year under review, such payments did not offend the tax rule against regular remuneration for independent contractors. In other words remunerating those two marketing agents regularly on a monthly or fortnightly basis did not have an adverse impact on the entrepreneurial autonomy of the marketing agents as independent contractors. The bottom line of the matter is that each marketing agent was entitled to be paid loan product marketed and approved which loan product he was at liberty to submit at any irregular intervals during the month.
Traverso J in ITC 1718 held the following: Where a marketing agent is found to be remunerated periodically on, say a monthly basis, then his claim of autonomous trade status is nullified by the second inclusion (bb) in paragraph 2.1. Where, however, the frequency at which the earnings payable is occasionally interrupted, as in casu, by one or more unpredictable events, the trade independents of such a marketing agent cannot be ensnared by the second proviso (bb) in paragraph 2.1, in other words a marketing agent cannot be disqualified as an independent trader. An individual remunerated does not become an independent contractor because the contract labels him or her so. By analogy the frequency of payment does not become a regular frequency merely because the contract described it as such. The words used in the contract must be scrutinised in order to find their true meaning. To do otherwise would be to prefer form to substance.