VAT: Director’s fees
On 4 May, SARS issued a Binding General Ruling (BDG) VAT 41 as a sequel to its BDG VAT 40 published on 10 February. This is intended to finally put to rest the treatment of activities conducted by Non-Executive Directors (NEDs) as those falling under proviso to the definition of “enterprise” in section 1(1) of the VAT Act, which refers to the services rendered by an “independent contractor” to an employer (recipient) under a contract in circumstances where such enterprise is carried on independently of the recipient.
This differs to proviso (iii)(aa) to the definition of enterprise, which refers to services rendered by an employee who provides his services under an employment contract; these services do not qualify as an independent enterprise and the employee therefore cannot charge VAT on his salary or commission. An employee commits his productive capacity to his employer when he enters an employment contract.
For purposes of the Act, activities of NEDs constitute the carrying on of an “enterprise” by the NEDs and therefore services rendered by “independent contractors” under a contract for services (as opposed to one of employment). In addition, such enterprise is carried out independently of the recipient. An independent contractor is one that commits his labour to the recipient (employer) to produce a given result in terms of a contract for services.
With the clarification of activities of NEDs falling within the ambit of proviso (iii)(bb), the following ramifications are inescapable:
- Should the NED have exceeded the compulsory registration threshold of R1 million in any consecutive 12-month period as prescribed under section 23(1)(a) of the VAT Act in respect of any of his director’s fees earned for services rendered qua NED, then an obligation arises for such NED to register as a VAT vendor by no later than 1st June 2017 and to account for VAT to SARS.
- The section 23(3) voluntary registration remains available to NEDs if the value of his fees does not exceed the compulsory VAT registration threshold as set out in section 23(1)(a) of the Act.
- Those NEDs who have previously registered as VAT vendors but did not account to SARS for VAT must start doing so by not later than 1st June 2017.
Author: Frank Setati