On 4 May 2017, SARS made a Binding General Ruling (BGR) that deals with the VAT treatment of the activities conducted by Non-Executive Directors (NEDs) and further clarifies whether those activities fall within the ambit of proviso (iii)(aa) or proviso (iii)(bb) to the definition of “enterprise” in section 1(1) of the Value-Added Tax Act 89 of 1991 (the Act).

The questions raised were whether NEDs should be regarded as employees or deemed employees under the Act, so that their income is subjected to employee’s tax; or independent contractors that may be liable to register for VAT, if their fees for services rendered exceed the VAT registration threshold of R1 million in any consecutive period of 12 months; or being subject to both employees’ tax and VAT.

It was concluded in a previous BGR that an NED is not considered to be a common-law employee. This is based on the view that the services must be supplied independently and personally by the NED. Any director’s fees paid or payable to an NED for services rendered in that capacity is therefore not regarded as “remuneration”. It follows that, for VAT purposes, an NED is treated as an independent contractor, as contemplated in the Act, in respect of those NED activities.

Thus, from 1 June 2017, an NED that carries on an enterprise in the Republic is required to register and charge VAT in respect of any director’s fees earned for services rendered as an NED, if the value of such fees exceed the compulsory VAT registration threshold of R1 million in any consecutive 12-month period as provided in section 23(1) of the Act. This rule applies whether the NED is an ordinary resident of the Republic or not. An NED may also choose to register for VAT voluntarily under section 23(3) if the value of such fees does not exceed the compulsory VAT registration threshold prescribed in section 23(1).