Abusive Employee Tax Incentive (ETI) schemes marketed by unscrupulous training providers has done massive damage to the training and development industry, leaving many businesses hesitant to revisit the many social and economic benefits of ETIs, but most crucially, exacerbating the plight of millions of young South Africans who remain unemployed and untrained.
“There has been significant movement and publicity around this issue, and SARS has moved swiftly to clamp down on the abuse of the ETI. Notably, SARS issued a Binding Private Ruling 367 in July 2021 which determined that trainees in learnership / training programmes cannot be considered as an employee as contemplated in the ETI Act, and thus the employer is not entitled to claim an ETI in respect of any of them. Many employers were ill-advised by unscrupulous learnership providers to place learners on their books as ‘employees’ and then claim the allowance under the ETI against their payroll PAYE each month. However, with SARS clamping down on tax abusive ETI schemes, many businesses find themselves in a serious bind financially and reputationally, having to pay back all monies claimed, and losing their tax compliance/clearance until the monies are returned, with interest. In many instances, this involves repaying millions of Rands in claimed ETIs that these businesses were never entitled to claim,” explains Trent Lockstone, Group CEO of SA Business School, part of Alefbet Learning.
“Beyond the abuse of the ETI, there is a far more sinister and unforgiveable consequence in a country with the highest youth unemployment rate in the world – and that is the exploitation of the youth who are unsuspectingly recruited and ‘employed’ when in fact they are trainees on a learnership programme – and who then go on to receive no or sub-standard training, no work experience, nor the mandatory minimum wage as this is then claimed by the training provider in lieu of training provided. Furthermore, it also undermines the original objective of the act which was to give new workforce entrants experience in a formal working environment to assist their path into subsequent employment,” adds Lockstone.
The ETI is a tax incentive aimed at encouraging employers to hire young work seekers, and in turn the employers who participate in this programme reduce their cost of hiring by reducing the amount of Pay-As-You-Earn (PAYE) that they must pay over to SARS, while leaving the wage or salary received by the employee unaffected. The ETI entitles a registered employer to reduce its pay-as-you-earn (PAYE) tax payments to SARS for the first two years in which they employ qualifying employees. A substantial 50% increase in the limits for the ETI was announced, effective from 1 March 2022, increasing the amount of tax relief employers can claim when employing young people. However, certain abusive schemes involving training providers, recruitment agencies and businesses emerged whereby they create the appearance of genuine employment so that claims for the incentive can be made on behalf of trainees, rather than employees. For the employer involved in the abusive ETI scheme, all the risk sits with them as the company would be faced with an additional SARS assessment as the employer receiving the ETI, having to pay back all the taxes plus penalties, along with the labour law implications of their actions.
“On the surface of it many companies/employers are convinced by the training partners that this is a legitimate practice. But when you unpack what is being done, this is a thinly veiled attempt by the training provider to secure significant income for themselves, and for the employer to generate a monthly income from the learnership while also claiming points on their BBBEE scorecard without spending a cent of their own money. It is ethically and morally reprehensible that such schemes have emerged on the backs of the most vulnerable in our society – unemployed desperate youth,” adds Lockstone.
“The question that every business leader needs to answer when approached by training providers marketing these schemes, is whether the so-called tax savings justify the gross social injustice that is being done, and their complicity in amplifying the agonising, often life-long unemployment figures facing our youth. Employers need to be vigilant regarding any involvement with these tax abusive ETI schemes and scams offered by third parties, as the employer ultimately carries all the risk in respect of the tax and labour obligations and penalties.
“For every business, it’s about doing the right thing for our country, our people, our economy and ultimately the bottom line. It’s important to work with professional, credible training and education partners that have the best interests of your business and the people that are trained and employed at heart – whether that be on a learnership programme, or through an employment programme where you can legitimately claim this ETI incentive and achieve the ultimate objective of training and employing more young South Africans in gainful, meaningful jobs,” concludes Lockstone.