Ricochet News

SARS Clarifies VAT and PAYE on director fees, but at what cost?

Feb 17, 2017
SARS Clarifies VAT and PAYE on director fees, but at what cost?

In 2016 the matter of whether non-executive directors (NED) were common law or deemed employees for Pay As You Earn (PAYE) purposes led to some debate with SARS and National Treasury. The other debatable issue has been whether those NEDs should be subject to Value-added Tax (VAT) to their directors’ fees. SARS noted that it would clarify the matter with an interpretation note or ruling on the VAT and PAYE principles rather than amending the legislation to merely deal with this specific instance.

Pursuant to this, on 14 February 2017, SARS issued Binding General Ruling 40 (PAYE) and 41 (VAT) to deal with the relevant tax consequences. These rulings clarify that resident NEDs are not common law or deemed employees and no PAYE will apply to them. However, the rulings also confirm that if such a director earns more than R1 million, he or she will be liable to register for and pay VAT. To this extent SARS also issued an additional communication on 16 February confirming that NEDs earning fees in excess of R1 million must register for VAT from the date that they earn or expect to earn more than R1 million over a 12-month period. This will, however, not apply to NEDs from whom PAYE was withheld historically as they only have to register going forward.

Unfortunately, the rulings do not address the concern raised that in terms of the Companies Act 2008 there is no distinction between an executive and non-executive director as to duties etc. as this is merely a governance constructs. 

These rulings, will, however, create some interesting challenges for NEDs.

What about non-tax resident NEDs?

Non-tax resident NEDs do not fall within the PAYE exclusion referred to in the rulings and such directors will continue to be subject to PAYE. However, as SARS have confirmed that these people do in fact carry on an independent trade even if they receive remuneration, they will seemingly also be liable to register for VAT should they render services in South Africa. This is due to the specific “independent trade” override to the remuneration exclusion in the VAT Act.

Who will carry the extra cost?

Directors are usually appointed on an agreed fee and in many instances these appointments did not consider VAT. Without VAT being specifically agreed, the stated amount of consideration will invariably be VAT inclusive. This will result in NEDs having to renegotiate their fees with companies on whose boards they serve. Furthermore, it is debatable whether the relevant company will be able to claim a VAT input on the VAT charged by the NEDs. One could argue that the fees for these services are invariably not incurred in the furtherance of the company’s enterprise activities, but rather for formulating its strategy. Should such a company agree to increase the NEDs’ fee to take cognisance of the VAT, this will invariably cost the company more money.

Suppose a non-executive director agreed to a fee of R1, 5 million per year. If it is agreed this is VAT inclusive, he will now only receive R1, 31 million, essentially losing R190 000. If the company agrees to amend his fee to result in an R1, 5 million nets payable to the NED, it will now have to pay him R1,71 million, increasing its cost by R210 000 as it possibly cannot claim the VAT input.

Retrospective VAT registration

The SARS communication to NEDs about their liability for VAT clearly states that only NEDs who had PAYE historically withheld and who are required to register, are allowed to register for VAT from the current period (i.e. February 2017) going forward. However, NEDs who had no PAYE withheld and non-tax resident NEDs who have exceeded the R1 million threshold historically will now have to register retrospectively, triggering penalties and interest in respect of the past non-payment of VAT. The input VAT that they would want to claim for expenses incurred for such historical periods will also be a challenge as they possibly do not comply with the documentation requirements. They may also face some challenges recovering the VAT from the companies they served.

Provisional tax, SDL and UIF

As NEDs never received remuneration, but trade income, they will also be liable to register for provisional tax and submit bi-annual returns, irrespective of whether they earn above or below R1 million.

Furthermore, where companies have historically withheld UIF and SDL, these amounts were, according to SARS’ binding ruling clarification, never payable as the NEDs were never employees for PAYE purposes. However, employers will only be able to claim the last five years of UIF and SDL due to prescription of self-assessments and will also be liable to refund the employee UIF contribution to NED as it should never have been deducted.

However, if a claim is made, SARS would also have the opportunity to reopen assessment for at least three years for companies who claimed these expenses. Practically, and given the immaterial quantum, employers may choose not to recover these amounts from SARS.

The position for non-tax resident NEDs is less clear as they possibly are still liable for SDL as being PAYE employees but not UIF as they are independent contractors. Further clarification may be necessary from SARS in this regard.


The clarifications by SARS are welcomed, however, they will cause some concern among NEDs and the companies they serve and further engagements to these practical challenges may be required. It will also result in a lot of additional compliance for NEDs and companies to consider; which will possibly directly impact the fees charged by NEDs.