The South African Revenue Service (SARS) has ruled in Binding General Ruling (BGR 41), issued on 10 February 2017, that non-executive directors (NEDs) should register and account for VAT on their directors’ fees where the fees exceed the VAT registration threshold of R1 million in a 12-month period, as they are not considered to be common law employees but independent contractors. BGR 41 was made effective from 1 June 2017.
On 4 May 2017 SARS issued an updated BGR 41 in which it determined, in terms of s23(4)(b) of the Value Added Tax Act, No 89 of 1991 (VAT Act), the VAT registration liability date of NEDs to be 1 June 2017. BGR 41 further clarifies that where NEDs are already registered for VAT but have neither levied nor accounted for VAT on their directors’ fees, they must start charging and accounting for VAT on such fees by no later than 1 June 2017.
The appointment of a director, including a NED, is a statutory appointment in terms of the Companies Act, No 71 of 2008 (Companies Act) and the role, function and duties of directors are prescribed by the Companies Act. The question remains as to whether a NED, in merely performing his or her statutory duties, indeed carries on an “enterprise” as that term is defined in the VAT Act, for which the NED is required to register for VAT. Nevertheless, in view of the SARS ruling, a NED who receives director’s remuneration in excess of the R1 million VAT registration threshold will be required to register and account for VAT with effect from 1 June 2017 in accordance with BGR 41 or risk being held liable for the VAT, penalties and interest, until a court may rule otherwise.
In determining the liability date of 1 June 2017, it appears that SARS may not have considered that s66(9) of the Companies Act provides that directors’ remuneration may be paid only in accordance with a special resolution approved by the shareholders within the previous two years. A company may, therefore, not increase the directors’ remuneration without the prior approval of the shareholders by way of a special resolution. The directors’ remuneration paid to NEDs who are required to register for VAT from 1 June 2017, will be considered to be VAT inclusive in terms of s64 of the VAT Act, unless prior shareholders’ approval for an appropriate increase is obtained before that date.
Section 67 of the VAT Act provides for a VAT amount to be levied in addition to a fee charged for services where VAT has been imposed for the first time on such services in terms of the VAT Act or the VAT rate has been increased. In SARS’s view directors’ fees paid to NEDs have always been subject to VAT hence no amendment to the VAT Act is required, but SARS has now merely directed in terms of s23(4)(b) of the VAT Act that NEDs only need to register and account for VAT from 1 June 2017. Accordingly, the VAT on directors’ fees paid to NEDs are not imposed for the first time in terms of the VAT Act as contemplated by s67, and a NED will thus not be able to rely on this provision.
Questions also arise with regard to the VAT position of non-resident NEDs. A person is required to register for VAT if the person carries on an “enterprise’, ie an activity on a continuous or regular basis in or partly in South Africa in the course of which goods or services are supplied for a consideration. This means that only activities carried on in South Africa will give rise to VAT registration, and in the absence of any specific place of supply rules in the VAT Act, it is open for interpretation as to where activities in relation to the supply of services are rendered.
SARS has ruled that a NED carries on an enterprise in the form of the supply of services. However, the nature of these services is not described. If the services rendered are considered to be the preparation for and attendance of board meetings, it seems that certain services such as the review of papers in preparation for a board meeting whilst the NED is not present in the country, could be regarded to be supplied outside South Africa. If the non-resident NED attends a board meeting in a foreign country by way of video conference, a further question arises as to where such services are rendered. The “enterprise” of the NED could therefore be considered to be rendered partly within and partly outside South Africa, and where the director’s fees attributable to the services rendered in South Africa are less than R1 million for a 12 month period, the non-resident NED may not be required to register for VAT.
The VAT position of a South African NED serving on a foreign company’s board is equally uncertain with regard to the obligation of such NED to register for VAT. If required to register, such directors’ remuneration may qualify for the zero rate, but the burden of the VAT registration and submission of VAT returns will remain.
Although BGR 41 does not provide clarity with regard to these aspects, NEDs may apply to SARS for a binding private ruling to clarify their VAT status and obligation to register for VAT where their scenario is not specifically dealt with in BGR 41.