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VAT LIABILITY FOR NON-EXECUTIVE DIRECTORS

On 10 February 2017, South African Revenue Service (‘SARS’) passed a Binding General Ruling(VAT) 41 (‘BGR 41’) which deals with the VAT treatment of the activities conducted by Non-Executive Directors (‘NEDs’) and clarifies whether those activities fall within the ambit of proviso (iii)(aa) or proviso (iii)(bb) to the definition of “enterprise” in section 1(1) of the Value-added Tax Act No. 89 of 1991 (‘Vat Act’).

As a result of the 2007 amendments to the Income Tax Act 58 of 1962 (‘ITA’) i.e. to the exclusions contained in the definition of “remuneration” in the Fourth Schedule to the ITA, some uncertainty developed as to whether the fees payable to an NED are subject to the deduction of employees’ tax. This, in turn, created uncertainty as to the application of proviso (iii) to the definition of “enterprise” in section 1(1) of the VAT Act, which excludes the activities of an employee, but includes the activities of a so-called “independent contractor”.

Despite Binding General Ruling (Income Tax) 40 (‘BGR 40’) taking effect, there was still confusion as to whether NEDs should be regarded as employees or deemed employees, under the Fourth Schedule to the ITA, or independent contractors. If NEDs were to constitute “employees” their fees would constitute “remuneration”, being subject to employees’ tax. If they were to constitute “independent contractors”, their fees would be subject to VAT (subject to the VAT Act).

BGR 40 provided, amongst other things, that:

  • a NED is not a common-law employee where there is no control or supervision exercised;
  • director’s fees received by an NED for services rendered as an NED on a company’s board, are therefore not “remuneration” and are not subject to the deduction of employees’ tax; and
  • fees received by an NED are not “remuneration”.

BGR 41 clarified that, for VAT purposes, a NED is treated as an independent contractor as contemplated in proviso (iii)(bb) to the definition of “enterprise” in section 1(1) of the VAT Act in respect of those NED activities. As such, a NED, whether non-resident or not, that carries on an enterprise in the Republic is therefore required to register and charge VAT in respect of any his or her fees earned for services rendered as an NED. This is, of course, subject to the registration requirements in the VAT Act (i.e. if the value of such fees exceed the compulsory VAT registration threshold of R1 million in any consecutive 12-month period). A NED may also choose to register for VAT voluntarily under section 23(3) if the value of such fees does not exceed the compulsory VAT registration threshold prescribed in section 23(1).

It is essential for NEDs, who satisfy the thresholds in the VAT Act, to act fast and register for VAT to avoid any harsh penalties the may be imposed by SARS.

Prepared by:

Lauren Barnard | Candidate Attorney

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This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)