The South African Revenue Service (Sars) has confirmed that non-executive directors (NEDs) of companies must register for and charge Value Added Tax (VAT) for any directors’ fees they earn. The rulings relate to the uncertainty surrounding their status as employees or independent contractors. In terms of the Income Tax Act, employees are subject to pay-as-you-earn (PAYE) as opposed to VAT.
Sars has ruled that NEDs are not employees receiving remuneration, but that they are independent contractors who are receiving fees for their services rendered to the company.
They will have to register for VAT from June 1 if their total taxable income exceeds R1million in any 12 consecutive months.
Jerry Botha, remuneration specialist at Tax Consulting and member of the South African Reward Association, says in most instances these directors have other business interests, or they are appointed to more than one board. They already have the right systems in place and the necessary people looking after their affairs.
He disagrees with the notion that there will be a decline in the number of NEDs or that there will be decline in the number of positions the NEDs hold. Botha says there are two major upsides to the rulings - there is now certainty in law, and directors can now claim expenses genuinely incurred in the production of their trade for tax purposes.
Employees, who are subject to PAYE, have had the door shut on most expenses incurred in the production of their trade, since Sars’ view is that those costs should be borne by the employer.
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Gerald Seegers, tax partner at PwC, says the decision to accept or not to accept an appointment now has an added complication for directors - namely their VAT status.
This will predominantly affect the chairpersons and those with three or more board appointments.
“It is likely they will not accept an appointment if, as a result thereof, they will then exceed the VAT threshold. This is unfortunate as a decision is being made for the wrong reason - namely tax,” he says.
Seegers says, although the decline in the number of positions will not necessarily mean a decline in the number of NEDs, it remains an unfortunate position, given the country’s lack of experienced directors.
According to the latest PwC report on the practices and remuneration of NEDs, there are currently 1 758 directors, excluding chairperson and deputy chairperson positions, serving on the boards of 355 companies listed on the JSE. The majority of them are South African (86 percent).
“The tax rulings only clarify the existing tax legislation. What it does not deal with is the solution and the unnecessary anomalies that the legislation created for non-executive directors."