Application of VAT on Labour Charges and Intercompany Staff Usage
Member Query
Scenario 1:
My client owns a labour broking company. They employ seasonal workers and then hire them out to other companies, charging a markup on the labour. Am I correct in saying that they must charge VAT on these labour services since it's their main business?
Scenario 2:
A client owns multiple companies, none of which are labour brokers, but sometimes employees from one company temporarily work for another? Is there VAT on that labour charge, which is just a cost recovery (no markup)? Do they need to raise an invoice, or can a journal entry suffice?
Our response
Applicable Legislative Requirements / SARS Guidance
Section 7(1)(a) of the VAT Act 89 of 1991 – VAT is levied on the supply of goods or services in the course of an enterprise.
Section 1(1) – Definition of “enterprise” includes regular supplies of services for consideration.
VAT 404 Guide for Vendors – SARS guidance on the treatment of taxable services and documentation.
Technical Analysis
Scenario 1 – Labour Broking Company
The company operates as a labour broker and employs seasonal workers, paying their salaries and handling PAYE. It then provides these workers to other businesses for a fee (including markup). This constitutes a taxable supply of labour services, and if the company is a VAT vendor, it must charge output VAT at 15% on all amounts invoiced for labour.
The confusion around “no VAT on labour” typically applies to salaried employees, but once labour is sold as a service (labour broking), VAT applies.
Even if the supply is only “labour,” it remains a taxable service under the VAT Act.
Scenario 2 – Temporary Intercompany Staff Usage (Not Labour Broking)
Where one VAT-registered company (the employer) allows its employees to work for another related company, it is effectively supplying a service—even if only reimbursed at cost.
If the employer company is VAT-registered, it must charge VAT on the recovered costs, regardless of whether there’s a markup.
SARS does not accept journal entries in place of VAT-compliant tax invoices. An invoice must be issued if a supply is made.
Conclusion / Recommendations
Scenario 1: Yes, VAT must be charged on labour invoiced by a labour broking company that is VAT-registered. This is a taxable service rendered in the course of business.
Scenario 2: Even without markup, if the company recovering costs is VAT-registered, VAT must be charged on the labour recharge to the other company. A tax invoice is required, not a journal entry.
Important Notes
The absence of a markup does not exempt a service from VAT if supplied in the course of an enterprise.
Ensure VAT compliance by issuing proper tax invoices and maintaining accurate intercompany agreements.
For ongoing shared services between entities, consider formalising charge-out policies and ensuring all group companies that should be VAT-registered are compliant.
