Qualifying for turnover tax or not

A Fin24 user is not sure when a business must register for turnover tax, since the term “service provider” is very wide. He writes:

I need some clarification on which industries and types of businesses may register for turnover tax.

It states that “it is not available to labour brokers, personal service providers or persons that render professional services”.

“Public benefit organisations and recreational clubs also do not qualify, since they already enjoy specific concessions.”

On the surface it seems like a lot of businesses would not qualify as most small business setups are providing a service of some sort, whether its a jeweler, musician or garden service.

I would like to know exactly what “personal service providers or persons that render professional services” means.

Any help would be very much appreciated.

Barry Ger, associate director, coroprate tax at KPMG, responds:

You are referring to the turnover tax which came into operation on March 1 2009 and which allows certain taxpayers, who qualify as “microbusinesses” to be taxed on their turnover at very low rates instead of their profits at the normal rate.

You are correct in noting that many types of small businesses are excluded from qualifying as a “microbusiness”.

As you point out, among these exclusions are “personal service providers” and “persons that render professional services”.

With regard to the “personal service provider” exclusion, a personal service provider is a specifically defined entity in the Income Tax Act that was introduced to eliminate a tax scheme whereby employees would resign from employment and form a company or trust which would then offer their services to their former employer.

In this way, these employees would avoid employees’ tax being levied on remuneration paid to them and also allow them to claim more deductions for personal expenses than they otherwise would have been allowed to claim if they were directly employed.

If an entity qualifies as a personal service provider, it is essentially treated as an employee for tax purposes and it would not qualify for the turnover tax.

With regard to the “professional services” exclusion, individuals or corporate entities that derive more than 20% of their receipts from professional services may not make use of the turnover tax regime.

Professional services are specifically defined to mean a service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport surveying, translation, valuation or veterinary science.

You will be pleased to know, though, that recently, following recommendations of the Tax Review Committee headed by Judge Dennis Davis, wide-ranging changes have been proposed to the taxation of small businesses, including the type of entities that will qualify for tax relief.

More clarity about these changes should be available shortly.

– Fin24