There has been uncertainty for some time as to whether employees’ tax (PAYE) should be deducted from payments made to Non-Executive Directors (NED’s) for the services they perform. There has also been debate around whether NED’s should charge VAT for their services.
The Minister of Finance undertook to clarify this in the February 2016 Budget Review.
Note that in this context “SARS considers an 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.”
SARS’ ruling on PAYE
SARS has issued a Binding General Ruling (BGR) which is effective from 1 June 2017.
For an NED to be considered subject to PAYE, two conditions would need to be met:
- The “Premises test” whereby more than 50% of the services performed by the NED are at the company’s premises, and
- The “manner in which the duties must be performed” or hours worked are subject to “the control or supervision test”.
Both of these stipulations would need to apply. Because SARS accepts that NEDs work independently of the company and thus do not earn employee remuneration, the second condition is not met. Therefore (for NEDs resident in South Africa), no PAYE needs to be deducted.
This also means that NEDs can deduct normal expenditure, allowances and losses from their NED income. This is in favour of NEDs as employees’ deductions are severely limited by the Income Tax Act.
Note this does not apply to non-resident NEDs and their fees are subject to PAYE.
SARS’ ruling on VAT
Another BGR has also been issued regarding VAT, also effective 1 June 2017.
Employees subject to PAYE are typically not considered to be carrying on an “enterprise activity” and cannot register for VAT. The only exception to this general rule is that non-resident NEDs are, as part of government’s new systems to tax money before it goes offshore, subject to both PAYE and VAT.
The VAT Act recognizes “independent contractors” as carrying out an enterprise and thus being subject to registering for VAT if earning R1 million or more per annum.
Accordingly, the services provided by NED’s fall within the ambit of the VAT Act and qualifying NEDs (the main qualification is earning R1 million or more p.a.) will be required to charge the company VAT when submitting invoices.
As stated above, non-resident NED’s are also required to register for VAT to the extent that they carry on their NED activities within South Africa.
These rulings provide welcome clarity for companies and NED’s.