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SARS’ Binding General Rulings 40 and 41 clarify the VAT vs PAYE treatment of non-executive directors (NED), with both rulings applying with effect from 1 June 2017.

A recent preliminary ruling by the Court of Justice of the European Union (CJEU) has, however, brought this treatment into question, as the CJEU ruling questions whether a NED in South Africa should be viewed as a taxable person for VAT purposes.

What is the South African view on VAT for NEDs?

In terms of the King III report, NEDs are not considered employees of the company on whose Board they serve.  Key to King III is the independence of NEDs – they are not engaged in the daily management of the operation; this role is being filled by the Executive Directors of the entity.

The NED’s role is to introduce an additional layer of diligence and care in Board decisions made.  It is their independence that is believed to be key in separating them as employees. 

Aligned with this, it is SARS’ interpretation that the fees paid to NEDs are not regarded as “remuneration” and are therefore subject to VAT. Once the taxable supplies of the NED reach the R1m threshold in any consecutive 12-month period (or R83,333 per month), VAT registration is mandatory.  

Why then the debate?

The treatment of NEDs in South Africa is now being challenged based on how that independence is being perceived. 

Whilst considered independent in their ability to make decisions, the question is now being asked as to whether they can be considered independent of the company on which board they serve. The challenge pertains to the view that decisions made by the NED in their role on the board they serve cannot be severed from the entity that benefits from those insights and decisions. 

Whilst this interpretation is debated, SARS’ Binding General Rulings 40 and 41 hold.

How we can assist

As Registered Auditors (SA), we understand the nuances of these rules and interpretations.  If you are concerned that your role as NED potentially places you in a mandatory VAT registration position, feel free to reach out to our team for assistance.  For more about our registration service, visit the relevant services page on our website.