VAT/Sales code on service by labour broker

[wouter.gerber]

Hi all,

I work for a labour broker. Currently we invoice as follows:

Income sales code - full amount (i.e. R 50,000.00), and charge VAT on the full amount.

Of the 50k, about 40k is paid to employees as wages, 2k for UIF, PAYE etc., and only 8k is our service fee.

This makes our annual turnover and sales HUGE. Lots of VAT, and a very high turnover for B-BBEEE.

I want to know if this is the correct way to invoice. I believe the invoice should be as follows:

Liability account or expense account code/wages - 40k - no VAT
Liability account or expense account doe/emp201 - 2k - NO VAT
Sales income code - service fee - 8k (with VAT)

Received mixed views and opinions from several people on this... Any comments welcome.

[Dave A]

I want to know if this is the correct way to invoice. I believe the invoice should be as follows:

Liability account or expense account code/wages - 40k - no VAT
Liability account or expense account doe/emp201 - 2k - NO VAT
Sales income code - service fee - 8k (with VAT)

Received mixed views and opinions from several people on this... Any comments welcome.

Nice try

W.R.T. VAT - unfortunately labour is not an exempt or zero rated supply. When it comes to VAT, my best suggestion is to keep a mindset that the money was never yours in the first place. Spend too much time coveting it and you'll go insane.

The only good news I've got is when it comes to turnover for BEE purposes, it's the turnover excluding VAT that counts.

[CLIVE-TRIANGLE]

To add to what Dave says, a recouped expense, as you are suggesting, is still subject to VAT. Also, if you think your proposal through you will see that it can't work because you will then only show the commission as income and no expense , whereas the total of wages and service fee is revenue, less employee cost = margin, i.e. the commission / service fee.

[Justloadit]

I don'y know on this one.

I have a similar issue when vending prepaid electricity.
As far as ESKOM is concerned, we do not sell prepaid electricity, and act as agents on their behalf. Since ESKOM issues the invoice to the client when purchasing, the client is paying the VAT at ESKOM, and since we have acted as agents, we get a VAT free invoice for all prepaid electricity sales. We do not get an invoice for the up front payment to vend electricity. We get a note stating they received the payment. At the end of every day, we get an invoice for the day's sales, excluding VAT.

The VAT portion that we charge/invoice is only on the profit of the sale.

The situation of the wages sounds the same to me. Wouter is acting as an agent in collecting the wages from the client, and passing it on to the employee, PAYEE and UIF, an invoice should not be issued for this, but rather a receipt for the money received totaling to this amount, for record keeping purposes. Wouter only issues an invoice for the service fee including VAT.

I would pop into SARS and get them to give you a ruling on this.

[Sathishzn]

Hi all,

I work for a labour broker. Currently we invoice as follows:

Income sales code - full amount (i.e. R 50,000.00), and charge VAT on the full amount.

Of the 50k, about 40k is paid to employees as wages, 2k for UIF, PAYE etc., and only 8k is our service fee.

This makes our annual turnover and sales HUGE. Lots of VAT, and a very high turnover for B-BBEEE.

I want to know if this is the correct way to invoice. I believe the invoice should be as follows:

Liability account or expense account code/wages - 40k - no VAT
Liability account or expense account doe/emp201 - 2k - NO VAT
Sales income code - service fee - 8k (with VAT)

Received mixed views and opinions from several people on this... Any comments welcome.

Hi all,

I also encountered this problem with a client of mine which logically speaking I knew was total nonsense to follow this practice of levying V.A.T on Wages so to make sure I was on the right path here, I consulted the VAT Act for adequate support of why this is incorrect.

Per Sec.7.1.a of the ACT:
“on the supply by any vendor of goods or services supplied by him on or after the commencement date
in the course or furtherance of any enterprise carried on by him; “

With emphasis on "enterprise" - The ACT defines this as (Definitions par.C(iii)(aa):
“the rendering of services by an employee to his employer in the course of his employment or the
rendering of services by the holder of any office in performing the duties of his office, shall not be
deemed to be the carrying on of an enterprise to the extent that any amount constituting
remuneration as contemplated in the definition of "remuneration" in paragraph 1 of the Fourth Schedule t
o the Income Tax Act is paid or is payable to such employee or office holder, as the case may be;”

This actually means that the levying of VAT is prohibited for this nature transaction.
If this was allowable, then every employer would be able to claim input VAT on the payment of remuneration(Wage/Salary) for each employee. OR Also consider this:
if allowable, then it would be smart for every Company to use the services of "Labour Brokers" and claim the added input VAT on the payment of wages & salaries. That's an added input VAT claimable right there! --> This is however improper practice.

The Labour Broker shall separate each transaction on the invoice and only levy VAT on their Value added services rendered which attracts VAT, i.e. "Brokerage Services/Fees for the period"

This is the proper way. Consider your groceries invoices, ever seen the asterisk on certain items?(Brown Bread, Fruits etc) These are basic goods which are exempt from VAT and rightfully so, no VAT is levied on these, even though they occur on one invoice.
VAT is levied only on taxable items and therefore an invoice is not required to disclose VAT on all the transactions on the invoice.
VAT shall be disclosed only for the VAT'able items on the invoice.

It is therefore wrong and also "illegal" (in contavention) per/to the "ACT" to levy VAT on non VAT'able items on an Invoice.

Hope this clears up this mess for you guys...
Great day all..!
Sathish. <email or pm me if any further assistance may be required>

[sterne.law@gmail.com]

There is another perspective
As a labour broker, ordinarily, the employees are MY employees, therefore I pay the salaries and my total invoice is for services etc (it is no different from a construction company who is building and pays the employees and calculates the invoice accordingly ,i.e, wages + materials + profit = invoice)
Regarding the VAT input - the broker would be out of pocket because the R50000 would include the VAT collected, and which has to be paid over, the employees total is paid, hence the VAT comes out of your profit. Conversly the client scoops some extra bob.
It is an intriguing conundrum, and in the absence of a specific directive and in conjunction with tax law of you are guilty now, lets see what you do about it, I would see this as the intepretation that would go down (at the same time invoicing the salary portion as Non VAT would provide great amo that the client is actually the employer should there be a labour dispute, and the client wont like that.)

If the employees are those of the "actual" employer, then I forfill what is merely an administrative task and the salaries are salaries. It would be the same as giving the accountant R50000 who then makes the payments accordingly

[CLIVE-TRIANGLE]

There is no doubt about the VAT angle. The charge from the broker to the client attracts VAT, even if it is a reimbursed expense.

The argument by Sathiszen is flawed because the section quoted refers to the relationship between the worker and the labour broker, whereas the one in question is actually the relationship between the broker and the client; and that relationship is clearly the "furtherance of an enterprise". The nature of the broker's inputs are not relevant, whereas his outputs are.

There is also very little that is exempt from VAT. Note that your examples are of zero rated supplies, rather than exempt supplies.

Regarding the accounting treatment; the IFRS defines revenue quite clearly and it is inclusive of recoupments.

In the past, some brokers insisted on offsetting wage cost with recouped revenue. The result was that they reflected only commission as revenue and only their administrative and overhead payroll cost as salaries and wages. As from Saturday the lodging of a Supplementary Declaration SD14 is obligatory. This requires you to balance the salaries and wages in your tax return with the total remuneration as per IRP5's. Uploading your AFS with the IT14 will also be obligatory. It stands to reason that from this criteria alone that you would be inviting some serious sanction should they not be in close agreement.

Regarding the classification of income; nothing prohibits a broker from reflecting the commission as Turnover and the recovered employee cost as other income, accompanied by the appropriate disclosure. Revenue can have components of which Turnover is but one.

[Dave A]

if allowable, then it would be smart for every Company to use the services of "Labour Brokers" and claim the added input VAT on the payment of wages & salaries. That's an added input VAT claimable right there!

Actually, once a company is registered for VAT, VAT becomes a zero sum game, therefor from the company's point of view there is no gain i.r.o. VAT. You're either paying the VAT to SARS (reduced input VAT claim), or you're paying it to the labour broker (input VAT) - either way you're paying the money (+ the labour broker's markup).

The Labour Broker shall separate each transaction on the invoice and only levy VAT on their Value added services rendered which attracts VAT, i.e. "Brokerage Services/Fees for the period"

Are you quoting an official document from SARS, or is this your own opinion/interpretation?

[Sathishzn]

Actually, once a company is registered for VAT, VAT becomes a zero sum game, therefor from the company's point of view there is no gain i.r.o. VAT. You're either paying the VAT to SARS (reduced input VAT claim), or you're paying it to the labour broker (input VAT) - either way you're paying the money (+ the labour broker's markup).


Are you quoting an official document from SARS, or is this your own opinion/interpretation?

Hi Dave,

Interesting feedback on this, hmmm... I looked into the matter in more detail and strangely enough I see that SARS deems a Labour Broker as an employee (Post Dec 1999) whereby this subsequently adheres to the definition of par.C of an enterprise, or more accurately does not support the furtherance of an enterprise, therefore confirming the non-VAT'able treatment on the invoice except for VAT'able items i.e. the service/brokerage fee.


The quote on the separation of transactions attracting VAT is my interpretation here (assimilated from IN.70)

Your comment on paying VAT to either SARS or the Broker is perfectly logical but seems somewhat unsuitable or improper.

I will look into this further and revert on findings...

[Dave A]

Out of (not so idle) interest - who issues the IRP5's (or IT3a's) to the employees -
the company using the services of a labour broker
or the labour broker?

Who pays over the UIF and PAYE contributions?

[CLIVE-TRIANGLE]

Hi Dave,

Interesting feedback on this, hmmm... I looked into the matter in more detail and strangely enough I see that SARS deems a Labour Broker as an employee (Post Dec 1999) whereby this subsequently adheres to the definition of par.C of an enterprise, or more accurately does not support the furtherance of an enterprise, therefore confirming the non-VAT'able treatment on the invoice except for VAT'able items i.e. the service/brokerage fee.

That's correct and if the broker was not in possession of an IRP10, the client was obliged to withhold PAYE at 34%.

Then some years ago (2008?) it was changed; only a natural person (and Trust, I think) can be a labour broker. An incorporation falls outside of the definition, but can fall foul of the personal service company provision.

If that seems unfair ... a labour broker as defined cannot deduct any expenses in determination of his profit; only salaries. That's quite draconian if you ask me.