In his 2016 budget speech to the National Assembly on 24 February 2016, the Minister of Finance, Pravin Gordhan (''the Minister'') referred to an issue that has been unclear for some time now. The issue is whether to deduct PAYE from non-executive directors’ fees or if directors should register as VAT vendors.
The law with regard to executive directors is simple and, like other employees, they are paid remuneration as per the provisions in the Fourth Schedule to the Income Tax Act and as such they qualify for PAYE. Furthermore, the rendering of services by an employee to his employer in the course of his employment and paid ''remuneration'' is specifically excluded from the definition of an enterprise, thus the executive director will not be considered a vendor.
The issue that arises is with regard to non-executive directors. There are different views on this matter and SARS and the National Treasury have yet to provided guidance on the matter. One view is that non-executive directors do not fall into the definition of employee as they are considered to be independent contractors. If this is the case, then non-executive directors do not receive “remuneration” as they are not employees. Fees received by non-executive directors considered to be independent contractors exceeding the VAT registration threshold of R1 million must be registered for VAT. Another view is that non-executive directors are employees and as such the Company must withhold PAYE on the ''remuneration'' they are paid. Fees received by non-executive directors exceeding the VAT registration threshold of R1 million must register for VAT. In this case, the employees’ (the non-executive directors) tax would be determined on the non-executive fees excluding VAT. This view is not necessarily in line with the general concept of the independency of non-executive directors from the company.
If non-executive directors register as vendors then the companies who hire them have to pay VAT at 14% on their fees. Considering South Africa's economic landscape, most companies will be reluctant to cough up, at minimum, R140 000 for all non-executive directors who are then registered as vendors. Furthermore, companies that are not vendors will not be able to deduct the VAT as input tax.
Non-executive directors obliged to register for VAT will have the administrative burden to deal with, as well as the liability for interest and penalties. The registration will be backdated to either the time the non-executive director became liable to register or, where it is by assessment by SARS, it will be backdated by 5 years from the date of assessment and interest and penalties will be charged.
The law is currently anomalous in that there seems to be different treatment for different non-executive directors. It will be interesting to see what guidance or clarity National Treasury will provide, although, our view is that non-executive directors should be considered to be independent contractors and, as such, should not be paying PAYE and, where they meet the requirements of a vendor, they should register as such.