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Employment Tax Incentive Abuse Targeted

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Chapter C of the Budget Speech delivered by the Minister of Finance on 24 February 2021, under the heading “Curbing abuse in the ETI”, confirmed that certain taxpayers had devised schemes using training institutions to claim the employment tax incentive (“ETI”) for students, and brought an end to this abuse.

The ETI is aimed at encouraging employers to hire young and less experienced work seekers. If an employer is eligible to receive the employment tax incentive in respect of a qualifying employee, the employer may reduce its employees’ tax payable to the South African Revenue Services (“SARS”). The ETI came into effect on 1 January 2014 and ends on 28 February 2029, and is governed by the Employment Tax Incentive Act, No. 26 of 2013 (“ETI Act”).

The ETI applies to employers who are registered for employees’ tax with SARS.  Employers generally deduct or withhold the amount of employees’ tax that is payable on employee. If a qualifying employer hires a qualifying employee, the ETI operates to decrease the amount of employees’ tax payable by the employer through the Pay-As-You-Earn (PAYE) system.

Since 2019, various ETI “schemes” were marketed to taxpayers, enabling struggling businesses to claim the ETI (or increase their ETI claims) in circumstances where they may not have been able to do so.  This gave rise to concerns as to whether these schemes are within the ambit of the ETI legislation.

Although there are variations of ETI schemes, in substance they were marketed to employers and potential employees by specialised recruitment agencies (“Promoters”) as a programme in terms of which the individuals were “employed” by the participating employers (“Employers”) on a 12-24-month fixed term contract of employment but were subcontracted to another company (“Company A”) and trained by a training institution (“College X”). The Employer would pay the “remuneration” to College X instead of to the individuals, and Company A would utilise the individuals for work and pay them a fixed sum of money each month.

Participants in the schemes took the view that, since the definition of “remuneration” for employees’ tax purposes, refers to “amounts paid in cash or otherwise and whether or not in respect of services rendered”, the payment of the remuneration in the form of training, entitled the Employer to claim an ETI allowance each month for the individuals “employed”.

The Employers included and reported the individuals as employees on their payrolls and claimed the ETI from SARS on a monthly basis. In essence, these “ghost employees” were used to round trip money between the Employer and the Promoter to create the framework for the required employment and payment of the individuals.

These schemes seem to be undermining the purpose of the ETI, which was to incentivise genuine job creation. This may also prejudice those employers who are legitimately utilising the incentive in the manner intended by the legislation to create sustainable employment and develop the necessary skills.

It became apparent that, in most instances, there was no intention for an actual employment relationship to be created between participating employers and employees as a result of these ETI schemes.

To counter this abuse, the definition of “employee” has been changed in the ETI Act to specify that the work must be performed in terms of an employment contract that adheres to record-keeping provisions of the Basic  Conditions  of  Employment  Act, No 75 of 1997.  These  amendments take effect from 1 March 2021.

Employers should therefore exercise vigilance in this regard to ensure that any transactions entered into do not undermine the ETI Act, in particular since the employer would carry all the risk in respect of the associated tax and employment obligations.

 

Liesl Kruger

Liesl has a BComm, BComm (hons), LLB and LLM and was admitted as an advocate in 2000. She specialises in tax work, having performed such work at Deloitte and KPMG, and as a director at Cliffe Dekker Hofmeyr and ENS. She joined Caveat in 2019 specialising in corporate tax.

 

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Caveat Legal is a legal consultancy with a team of specialised and experienced lawyers in a number of commercial fields of law: www.caveatlegal.com

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We achieve this by making our panel of 55 Top Tier lawyers available to consult to businesses – either remotely or in house – on a brief, retainer or secondment basis. Caveat was founded in 2011 and has established itself as a market leader, covering all of the commercial fields of law and servicing an impressive range of medium-sized and large businesses. 

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