What are non-executive directors subject to pay?
Speculation has persisted for quite a while about whether or not non-executive directors are subject to VAT and/or PAYE.
It seems that the debate is finally over. During February 2017 SARS issued two Binding General Rulings (40 and 41) – clarifying the VAT and PAYE treatment of non-executives.
In order to understand the implications of these rulings, we’ve provided a brief explanation of each, and what exactly they mean.
As part of Binding General Ruling 40 SARS issued a definition of non-executive director: “A director who is not involved in the daily management or operations of a company, but simply attends, provides objective judgment, and votes at board meetings.”
With this definition firmly established, SARS feels that non-executive directors should not be referred to as common law employees. In order to justify its outcome, SARS states that the only way that non-executive directors would be subject to employees’ tax is if the statutory tests for determining an employee apply.
Says chartered accounting and tax advisory firm Octagon Chartered Accountants: “What employers, and in particular non-executive directors need to keep in mind is that both statutory tests must be applicable. If only one is, then the non-executive director will be considered not an employee.”
The statutory tests, which will help to determine whether the non-executive director is an employee, include:
- The Premise Test. Essentially, more than 50% of duties performed must be on the employers’ premises; and
- The Control or Supervision Test. This means that either control or supervision must be exercised over the way that the duties are performed or the hours of work.
Notes Octagon: “Payments made by a company to a non-executive director does not qualify as a form of control or supervision of hours worked. Non-resident, non-executive directors will still be subject to PAYE.”
SARS’s Binding General Ruling 41 again explained the difference between an employee and an independent contractor: “An employee is a person who commits their productive capacity to an employer in terms of an employment contract, whereas an independent contractor commits their labour to the recipient [the employer] to produce a given result in terms of a contract for services.”
Says Octagon: “As SARS does not consider non-executive directors as common law employees, but rather as independent contractors, it requires non-executive directors to register for VAT, where the aggregate of fees received by the non-executive director exceeds the R1 million threshold for any consecutive 12 month period. This ruling applies to both resident and non-resident non-executive directors.”
SARS has indicated that this Binding General Ruling will come into effect from 1 June 2017. Non-executive directors who qualify will have to register before and account for VAT from that date.