Non-Executive Directors and VAT and PAYE

Relevant documents:

SARS Binding General Ruling (BGR) 40
SARS Binding General Ruling (BGR) 41

Binding General Ruling (BGR) 40 (issued on 10 February 2017) confirms that non-executive directors (NEDs) are not common law employees and that no control or supervision is exercised by the company concerned, over the manner in which a NED performs his or her duties or the NED’s hours of work.

Based on the above, the fees earned for services rendered as a NED do not constitute “remuneration” as contemplated in paragraph 1 of the Fourth Schedule to the Income Tax Act and should therefore not be subject to the mandatory deduction of employees’ tax (PAYE) by the company concerned.

Binding General Ruling 41 (also issued on 10 February 2017) clarified that NEDs are carrying on an “enterprise” in respect of services rendered as a NED. Binding General Ruling 41 (Issue 2) was subsequently issued on 4 May 2017 to clarify certain aspects relating to a NED’s liability date for VAT registration. Binding General Rulings 40 and 41 both apply with effect from 1 June 2017.

Following the publication of these BGRs, various questions have been received regarding the liability for a NED to register for VAT, as well as the relevant income tax implications. The questions and answers below are therefore intended to provide more clarity on certain practical and technical aspects relating to the BGRs.

Below are some FAQs of interest to the reader. Should your particular question on NEDs not be answered below, you can submit a ruling application to the South African Revenue Service headed “Application for a VAT Class Ruling” or “Application for a VAT Ruling” together with the VAT301 form by e-mail to

Do the BGRs apply to NEDs of public entities, private companies, and state-owned companies?

Yes. The BGRs apply to any person appointed as a NED under the Companies Act 71 of 2008. It does not matter what type of company the NED serves – whether it be a public, private, state-owned, or non-profit company. The South African Revenue Service cannot rule on whether a particular entity falls within the definition of a “company” for purposes of the Companies Act and whether a particular individual is a NED or not.

I am a member of an audit committee. Do the BGRs apply to me?
Yes. The BGRs apply to the extent that the member is a NED, serving in any of the various committees of a company. This includes, for example, Board committees, Risk and Audit committees, Remuneration committees, and Social and Ethics committees.

Should all NEDs register for Value Added Tax (VAT)?
No. Only those NEDs that earn NED fees and other income from taxable supplies that have, in total, exceeded the compulsory VAT registration threshold of R1 million in any consecutive period of 12 months (or will exceed that amount in terms of a written contractual arrangement). Non-executive directors that earn fees below the compulsory VAT registration threshold can choose to register voluntarily if the minimum threshold of R50 000 has been exceeded and all the other requirements for voluntary registration have been met.

What happens if I am not liable to register as a vendor, and do not register voluntarily?
You will not levy and account for VAT on the supply of your NED services. Furthermore, you will not be able to deduct any VAT incurred on goods or services acquired in order to supply your NED services.

Must I still register for VAT if my NED fees exceed the VAT registration threshold, but Pay-As-You-Earn (PAYE) is being deducted?
Yes. Binding General Ruling 40 clarifies that the fees earned by a NED (sole proprietor) should not be subject to PAYE unless the NED voluntarily elects for PAYE to be deducted from those fees. However, fees earned by non-resident NEDs remain subject to the compulsory deduction of PAYE as stipulated in BGR 40. It should be noted that the registration for VAT and the deduction of PAYE has no bearing on each other.

Must a non-resident NED register for VAT?
This will depend on whether or not the NED is conducting enterprise activities in the Republic, or partly in the Republic.

Can a NED choose to register and account for NED fees in a company?
No, a NED is appointed to serve a company as a natural person. As such, the NED will be providing those services in the capacity of a sole proprietor. A company cannot render services in that capacity.

When determining if I exceed the compulsory VAT registration threshold, must I only take into account NED fees earned?
No, you must add together the value of all taxable supplies of goods or services made in the course of all your enterprises that you conduct as a sole proprietor. For example, if, in addition to your NED fees for serving on the board of a company, you also supply forensic accounting services to other clients in the normal course of conducting an enterprise as a sole proprietor, then you need to add the total value of NED fees and the total value of service charges from the forensic accounting business together. The resultant total value of income from taxable supplies in a 12-month consecutive period must then be compared to the R1 million compulsory VAT registration threshold to see if you have to register.

Must I add my salary earned as an employee together with my NED fees when determining my VAT registration liability?

No. Any salary (or any other type of remuneration) earned in the capacity of an employee is not taken into account when determining your VAT registration liability. The reason is that
NED fees or other charges for goods or services supplied constitute consideration received for the taxable supply of goods or services, whereas remuneration earned for services supplied to your employer is not.

I am an executive director. Do the BGRs apply to me?
No. Executive directors are normally regarded as employees of the company which they serve. The BGRs only deal with individuals that are appointed as NEDs to serve on the board of a company as contemplated in the Companies Act. As such, NEDs are regarded as independent contractors (sole proprietors) that provide services to the company concerned in their personal capacity and are therefore treated differently to employees of the company.

I am a NED and receive other benefits, for example, a company car in addition to the NED fees. How should it be treated for income tax purposes and VAT purposes?
The Seventh Schedule to the Income Tax Act 58 of 1962 must still be used to value such taxable benefits granted to the NED. Although the taxable benefit is valued under the Seventh Schedule, it will not be included in “remuneration” and no PAYE needs to be deducted or withheld. The value of the benefit will be included in the total fees earned by the NED and subject to normal tax on assessment. For VAT purposes, the value of the benefit forms part of the calculation of the consideration charged in respect of the NED services. The NED is therefore required to account for VAT based on the open market value of the benefit as well as any other component of consideration which is used to calculate the total of the NED fees.

In the event that a NED registers for VAT, does the NED still, remain liable for income tax?
No, the BGRs only apply to NEDs. However, whether or not a person is an independent contractor and whether such a person has a liability to register for and charge VAT on their services must be determined by applying the normal VAT rules as contemplated in the definition of “enterprise”. You will be liable to register and account for VAT if the income earned from your activities as an independent contractor exceeds the VAT registration threshold of R1 million in any consecutive period of 12 months or will exceed that amount in a period of 12 months in terms of a contractual obligation in writing. SARS does not rule on whether or not a person is an independent contractor.

Which supporting documentation must be submitted with the VAT registration application form?
The standard supporting documents that are required for a normal VAT registration application must be submitted, that is, proof of identity; proof of address; proof of banking details;
representative/tax practitioner’s details and financial information.

The following documents will be accepted as proof of financial information:

• Copy of the letter of appointment as a NED;
• IRP 5 certificate with a source code 3620 or 3621 (where PAYE was deducted from the NED’s fees); or
• Copy of the minutes of the directors’ meeting where the consideration for NED services has been approved; or
• Copy of a service contract/agreement evidencing the consideration for NED services.

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