Starting a tiny consulting business...

[Willie Trombone]

I have a friend who is starting a tiny consulting business. The only reason for going that route is that the company she is being hired by wants to hire her as a consultant rather than an employee. This works for her, but she wants to know if she legally needs to register a business to offer consulting services... or can she simply offer services in her private capacity. She understands she will have register with SARS as a provisional tax payer regardless.

Any advice to keep it simple? I recall from doing the same thing myself many years back, that I registered a sole proprietorship with our regional services council, got a business number and had to pay levies regularly - a percentage of turnover etc. This is the bit that's a schlep, it's not a lot of money, but it was a huge schlep. Provisional tax on it's own can be painful.

Any advice is appreciated.

 

[DominionZA]

I work as an independent contractor but through a CC. If I did not have the CC, my clients would have to manage income tax etc.. With a CC I invoice them and manage my taxes myself. You can't register a CC anymore but AFAIK, you can still get off the shelf CC's (or something like that).

 

[Willie Trombone]

Interesting, thanks Mike. Her 'client' is apparently supposed to by law withold taxes and furnish her with a certificate annually which is interesting to me. I thought that was only required for employees but apparently it's required in this case for some reason.

 

[DominionZA]

That is only if she contracts directly to them. The reason I held onto my CC.
There are some way more informed peeps here on MyBB that should chime in shortly to provide helpful insight.
I just remember that my accountant told me to keep the CC and trade through it when I gave up my dev house and became a contractor. Has worked well for me.

 

[Willie Trombone]

Thanks Mike, all help much appreciated!

 

[DJ...]

You don't need a CC to invoice. You in fact don't need to register anything. She can invoice and then manage the income tax on her own as a provisional tax payer. There's no need for registrations with councils and so on. Just register for e-filing and submit an IRP6 twice or three times a year depending on how she wants to pay, and submit an ITR12 once a year. It's easier than it sounds. She'll only complicate matters registering a company for just her income, unless she intends to use the brand she creates in other ways, or if she's earning an amount that might warrant some thought about mechanisms for tax efficiency...

 

[DJ...]

Interesting, thanks Mike. Her 'client' is apparently supposed to by law withold taxes and furnish her with a certificate annually which is interesting to me. I thought that was only required for employees but apparently it's required in this case for some reason.

Wait, what now? If she invoices in her personal capacity or even as a sole proprietor which doesn't require formal registration, they do not get involved in the tax side of things. Only the VAT. She cannot charge VAT unless she registers. If she's invoicing as a consultant then they approve and pay the invoiced amount. She's not an employee so the tax liability is not theirs to pay.

Sounds like something more complex is in the works here. Is she perhaps not being contracted to the company as an employee? If so then the tax burden is theirs and there's no need to register a company, nor invoice anything if done right. They cannot manage the tax liability of a non contracted employee. For all intents and purposes, that's not an employee of the company, so it is not dealt with on their payroll. It will require authorisation of an invoice...

 

[AchmatK]

Wait, what now? If she invoices in her personal capacity or even as a sole proprietor which doesn't require formal registration, they do not get involved in the tax side of things. Only the VAT. She cannot charge VAT unless she registers. If she's invoicing as a consultant then they approve and pay the invoiced amount. She's not an employee so the tax liability is not theirs to pay.

Sounds like something more complex is in the works here. Is she perhaps not being contracted to the company as an employee? If so then the tax burden is theirs and there's no need to register a company, nor invoice anything if done right. They cannot manage the tax liability of a non contracted employee. For all intents and purposes, that's not an employee of the company, so it is not dealt with on their payroll. It will require authorisation of an invoice...

On mobile so can't reply in detail. Independent contractors are taxed at a flat rate of 25%. There are certain ways of getting around this. Lookup the guide i.r.o employee tax on the SARS website.

 

[DJ...]

On mobile so can't reply in detail. Independent contractors are taxed at a flat rate of 25%. There are certain ways of getting around this. Lookup the guide i.r.o employee tax on the SARS website.

By their client though? I've been consulting for years. Never seen this done...

Also on mobile BTW...

 

[etwylite]

If more than 80% of your invoiced work comes from a single client, you are deemed an independant contractor and that client must withholld tax at 25%.

You still claim expenses etc. But reconcile on your ITR12 annually.

 

[DJ...]

Interesting. Never encountered that before, but I've never been reliant on a single client. How does the client become aware of your financial status though? Is it a required disclosure?

 

[AchmatK]

Yes, by the client. Even registered companies offering consulting services can fall under the provisions and PAYE at 30% must be withheld if they are not in possession of an IRP30 (need to check this).

Its not strictly enforced by SARS but the client can be held liable and fined if SARS does an audit.

 

[DJ...]

Thanks for that. Gonna do some digging. Still unsure how that disclosure works though. And PAYE on a company? Wow...

 

[AchmatK]

Thanks for that. Gonna do some digging. Still unsure how that disclosure works though. And PAYE on a company? Wow...

No problem. Its like most acts, very broad and far reaching but not properly enforced.

Like claiming VAT on company expenses like a laptop that is used a certain percentage by the director for personal use and then only claiming the VAT proportionately. I have yet to come across a client that does this and then includes it as a taxable fringe benefit for personal use of a company asset. SARS also does not pick this up when doing a VAT audit.

 

[DJ...]

Any details on how that disclosure works re: the 80%? Is it a good faith disclosure? And how does a small business quantify this upon assumption of work? Their invoice amounts may vary (as they do with small businesses) and the company might take on new clients in the year, at which point they have operated at a cash flow disadvantage of up to 25%. I can see it from SARS's point in terms of there being an opportunity to evade a portion of tax if people adopted this approach, but surely there are other mechanisms which would be far more efficient? I mean SARS still have recourse at the end of the tax year upon submission if it is shown that >80% of revenue was generated from a single client. Is their reasoning here to prevent shock tax bills? If so, then I don't see how impeding cash flows can be a viable solution...

 

[Messugga]

Thanks for that. Gonna do some digging. Still unsure how that disclosure works though. And PAYE on a company? Wow...

Yeah, I reckon it's to prevent everyone from signing 10 year contracts or whatever, with their current employer, via a company, allowing them to make deductions on a whole bunch of things.

 

[AchmatK]

Yeah, I reckon it's to prevent everyone from signing 10 year contracts or whatever, with their current employer, via a company, allowing them to make deductions on a whole bunch of things.

Actually it's targeted at labour broking which is basically consulting via a company. One of the reasons would be your example above.

 

[DJ...]

So I see I;m not the only one who's spotted the obvious, and rather serious cash flow implications of this - http://www.fanews.co.za/article/int...sonal-services-provider-debate-heats-up/11660

I see that one can apply for a more appropriate directive, but then what is the point if that is the case? Truly, it serves no purpose if the directive is sincerely intended. It appears to be a caveat SARS are using to show that the act is not limiting business operations, when it clearly does. I also see now where a company can become liable for PAYE. That's just astonishingly short-sighted imo. And what about large commission-only earners not contracted? The same cash flow burden/liability strikes. And what if you source your business from a single LISP? Same problem, and unnecessarily so.

I can't find the positives in this act. If it was truly to close the resignation-to-consulting loophole, then it would have surely become easier to create legislation to specifically address this matter without the need for classifications of PSPs so broad that it unfairly penalises legitimate businesses?

 

[DJ...]

Actually it's targeted at labour broking which is basically consulting via a company. One of the reasons would be your example above.

Might be targeted there, but the net catches brokers, independent CFPs, SMEs from all walks of life starting out, and other commission-only earners not contracted. Awful piece of legislation if you ask me. Can't believe I wasn't aware of it before...

 

[AchmatK]

I think another part of it is to widen the tax net and force compliance especially with sole props as many are not declaring the income on their ITR12. I do agree that it is unnecessary onerous on the client and HR departments to monitor and administer this. Many HR departments I've worked with have very limited knowledge of the Income Tax act and focus mainly on the LRA, BCEA and SDL.

You also need to apply for a directive for every client.

Many companies are falling foul of the law and enforcement will pickup as SARS tries to squeeze for more money every year.