VAT Rather Than PAYE for Non-Executive Directors
In the 2016 budget review, Finance Minister, Pravin Gordhan stated that clarity was required on whether the fees received by a non-executive director ("NED") should be subject to PAYE or VAT.
SARS was mandated to provide clarity on the issue and, almost a year later, on 10 February 2017, SARS issued two Binding General Rulings ("BGR") 40 and 41 for both PAYE and VAT respectively. What did come as a surprise was that SARS did not approach the public to provide comments before finalising the Rulings, and instead, published the BGR's as final documents.
For purposes of BGR40, SARS considers a NED to be a director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgment, and votes at board meetings.
With a brief explanation of what constitutes a NED, SARS accepts that the nature of the duties of a NED mean that NEDs are not common law employees. The only way that a NED would be subject to employees’ tax is if the statutory tests for determining an employee apply.
There are two statutory tests that must be satisfied for an independent contractor to be deemed to be an employee. The tests are as follows:
The Premises Test: more than 50% of the services must be performed at the premises of the employer; and
The Control / Supervision Test: control or supervision must be exercised over either the way the duties must be performed or the hours of work.
Where only one or neither of the statutory tests applies, then a NED is not deemed to be an employee. In this regard, SARS concludes that there is no control or supervision exercised over the way a NED performs his or her duties, or the NED’s hours of work and as such a NED is not considered an employee and the amounts payable to such a NED will not constitute remuneration.
In BGR41 SARS considered whether a NED is an employee as envisaged in the Income Tax Act or an independent contractor that may be liable to register for VAT if the fees he receives for services rendered exceed the VAT registration threshold of R1million in any consecutive period of 12 months.
For purposes of BGR41, SARS considers:
An employee as a person who commits his or her productive capacity to an employer in terms of an employment contract; and
An independent contractor as a person who commits his or her labour to the recipient (employer) to produce a given result in terms of a contract for services.
SARS states that as BGR40 concludes that a NED is not considered to be a common law employee, by rather an independent contractor as the services are supplied independently and personally by the NED, it follows that for VAT purposes, a NED is also considered to an independent contractor. Accordingly, where the fees that the NED receives exceed the R1 million threshold, the NED must register for VAT.
A NED escapes PAYE on the fees that he or she receives, however, VAT catches a NED whose fees exceed the R1 million threshold.