Definition of personal service company

[deweyzeph]

Hi there

So I've read all the interpretation notes from SARS on the what a personal service company is, and I understand the tests involved.

I've just registered a new pty ltd company and I plan to start a hosting company specialising in selling hosting products. As far as I can see my company will not be defined as a personal services company. The only thing I am concerned about though is the following paragraph:

where more than 80 per cent of the income of such company or trust during
the year of assessment, from services rendered, consists of or is likely to
consist of amounts received directly or indirectly from any one client of such
company or trust, or any associated institution as defined in the Seventh
Schedule to this Act , in relation to such client,

I have 1 major client and a few smaller ones lined up. However there is a chance that more than 80% of my income will come from the 1 major client I have. As far as I can see this will not bring me into the definition of a personal services company as long as selling a hosting package is not defined as rendering a service.

Can anyone confirm my interpretation of this as correct? Would selling hosting be considered as rendering a service?

Many thanks

[Dave A]

A web hosting service is definitely a service.
And I suppose you're not employing staff? (If yes, how many?)

The obvious solution is to acquire more clients.

[BusFact]

This irritating bit of legislation is there to prevent people from avoiding employee taxes by working as a corporate entity.

Ultimately the test is whether you would be seen to be an employee of the client company if you had not formed your new company. If your company owns the hosting hardware and software and rents these services out, that is unlikely to be seen as what an employee would do. In addition if the work is not carried out at their premises all the time and they have no control over your hours of work, you become even less like an employee.

The 80% rule is really the weakest of the requirements and I would imagine that you are perfectly safe. I vaguely even recall this rule having been removed recently, but can't find anything to back that memory up yet.

So I believe you are safe from this form a SARS point of view, however its very, very risky business practice to have one client generating 80% of your income. Your first priority is to diversify your client base - quickly.

[deweyzeph]

Thanks for your input guys.

The hosting company will definitely own, manage and run its own servers (sitting in a data centre) and the 1 client that may bring in more than 80% of income is really a genuine client, not someone who has any control over me or my company or anything that we do, nor will we ever even visit their premises, nevermind work on site.

As far as relying on 1 client is concerned, if that 1 client was removed, the business would still generate a healthy profit. It's just that this 1 client would bring in so much extra income due to the specialised hosting that they require that it would possibly constitute more than 80% of the total income. I just want to cover my bases here, tax-wise.

But from what I can see, the 80% rule is moot if what you are selling is not considered to be a "service". I'm still not convinced that SARS would consider selling web hosting to be a service. The reason is that it is not something that is personally done by myself, the connected person to the company. It is more like a commodity that is sold. The actual "service" of hosting is done by the servers that I own.

Can anyone offer their opinion on that?

[Dave A]

I chewed over the possible effects of who owned the server equipment from the outset, and I'm not convinced it's a factor.
The normal scenario is you're still managing the servers and the client is actually accessing your managed platform.

About the best analogy I can think of is car rental. If you just rent the vehicle, that's not a personal service. If you drive the vehicle, (with your client giving directions) that is a personal service and the vehicle is just a tool of your trade.