HAB Personnel Services CC v CSARS

Facts

On 23 March 2015, SARS issued a letter of finalization of an audit, which outlaid the taxpayer’s, i.e., HAB personnel Services CC (“HAB”) business plan to render construction services for clients at the taxpayer’s “allocated” site. Mr Mc Dermid, trading as Kriel Business Solutions (“KBS”), performed services at the allocated site of the taxpayer, i.e., HAB and utilized the taxpayer’s employees in 2011. In 2012 and 2013, the working conditions changed and were performed on KBS’s premises with five employees not on HAB’s payroll. As such, SARS regarded KBS as an independent contractor for the 2012 and 2013 years of assessment, and for the 2011 year of assessment regarded Mr Mc Dermid (“Mr M”) an employee of HAB due to work performed on the taxpayer’s premises and under stipulated and supervised hours. The SARS assessment reflected that HAB was obliged to have deducted PAYE and SDL for remuneration paid to Mr M. Mr Aslett, the second individual, was trading as JFJ Construction (“JFJ”) and performed work under supervision on the taxpayer’s premises with the use of the taxpayer’s employees. It was declared that JFJ had no employees of its own and would reimburse HAB for use of its employees. The SARS assessment reflected that Mr Aslett, (“Mr A”), was not an independent contractor, and accordingly HAB was also obliged to withhold PAYE and SDL for remuneration paid to Mr A. The under-declaration of PAYE and SDL by HAB on Mr M and M A’s remuneration resulted in penalties and interest becoming payable. On 19 August 2015, the taxpayer objected to the SARS’ audit findings by emphasising that Mr M should be considered an independent contractor for 2011 tax year as he met the requirements relating to premises and supervision. Additionally, SARS should separately consider Mr A’s capacity as technical advisor and independent contractor as the PAYE remuneration is only deductible on the remuneration as technical advisor. SARS disallowed the objections, and the taxpayer lodged an appeal with the tax court on 17 November 2015.  The tax court dismissed the taxpayer’s appeal. 

Issues

Issue 1 – Whether KBS and JFJ qualified as independent contractors for purposes of the exclusion from “remuneration” defined in the Fourth Schedule to the Income Tax Act No 58 of 1962 (“Fourth Schedule”).

Findings

Mr M was a 49 percent shareholder of HAB and had a seat on HAB’s board during the relevant time.  Mr M had no voting rights though. Mr M was also during 2011, employed as the general manager and “business advisor” of HAB.  The sub-contractor agreement Mr M relied on, save for a one-page “letter of understanding”, was oral and based on mutual trust. Mr M was also not able to explain how he could be an independent contractor to HAB, when his written contract of employment with HAB expressly precluded him from doing so.  Regarding Mr A, who conceded that he was an employee of HAB but alleged that in respect of his work performed by him on the construction sites for HAB, 40 percent would be as an employee and 60 percent will be as an independent contractor.  Mr A explained that there is a difference between “managing” and “supervision”.  This answer did not make sense to SARS, (or the courts), and the question was raised that if Mr A had the expertise to “supervise”, why couldn’t he “supervise” as an employee?  Contrary evidence was presented by the taxpayer and lacked the required probabilities to succeed.  The evidence presented by SARS showed that HAB, under the general management of Mr M secured contracts with Eskom to perform construction work at Eskom sites.  Both Mr M and Mr A had been employed by HAB during the relevant times.  HAB had 600 employees who performed the required work in respect of the contracts, and only HAB received payment from Eskom.  HAB was the registered employer and deducted PAYE and SDL, and made payment to Mr M and Mr A. The lack of corroboration, and doubtful credibility in the witnesses, resulted court finding the SARS assessment of the taxpayer correct.

The appeal was dismissed with costs, including the cost of two counsel where employed.   

Find a copy of the court case here.

10 February 2023