Tax pain for some directors
• Nonexecutives will have to register for VAT from start of June as new regulations classifying them as independent contractors kick in
Nonexecutive directors could face onerous obligations after the South African Revenue Service ruling that they needed to register for value-added tax before June 1, some analysts said.
Nonexecutive directors could face onerous obligations after the South African Revenue Service (SARS) ruling that they need to register for value-added tax (VAT) before June 1 2017, some analysts say.
There are 2,248 nonexecutive directors in SA, most of whom earn more than the annual R1m threshold for registration of an enterprise under the VAT Act.
“Many may decide it is not worth their while to serve,” said PwC VAT partner Charles de Wet. He described the new regulations as problematic. “It is quite a process to register for VAT and will place extensive and continuing administrative rules and regulations on nonexecutive directors,” said De Wet.
This includes paying over VAT every two months and keeping records of all costs that may be deducted as input VAT from output payments.
Cliffe Dekker Hofmeyr VAT specialist Jerome Brink said SARS had clarified the status of nonexecutive directors as “independent contractors”. All would be required to register for VAT.
“However, nonexecutive directors do not have to account for VAT in respect of directors’ fees received before June 1, provided they were subjected to employees tax.”
The ruling, issued on May 5, ends a protracted dispute in which nonexecutives argued they were not common law employees but received “remuneration” — directors fees and services — that entitled them to pay employees tax, commonly known as PAYE.
VAT legislation excludes employees from the crucial definition of “enterprise”, whereby employees fall outside the VAT ambit. However, the VAT Act does include the activities of “independent contractors”.
SARS has ruled that a nonexecutive director is not a common law employee and does not receive remuneration.
This relies on the definitions in the King 3 report, which states that a nonexecutive director provides “objective judgment independent of the management of a company”.
SARS says in its ruling that if a nonexecutive director is not deemed to be an employee and is not a common law employee, the amounts payable will not be remuneration and are not subject to the deduction of employees tax.
De Wet said SARS followed a hard line on the issue, creating a lot of unnecessary “noise”.
“There could have been more consultation on a simplified registration process, for example.”
He said there was a view that the PAYE system worked well for nonexecutives and there was no clear need to change it. Now nonexecutives would have to add a 14% cost to their services.
The South African Reward Association welcomed the ruling, saying nonexecutive directors would not be subject to withholding taxes and would be allowed to deduct expenses incurred in the production of income. The reasoning was in line with King 3 and 4 codes.
However, De Wet questioned the benefits. “The eventual deductions allowed may be quite small, such as relating to computer usage,” he said.
SARS stood to gain more in VAT collections than it probably got on PAYE, he said.
VAT tax practitioners stood to gain because SARS’s previous requirements from nonexecutives were mostly limited to filling out an IRP5, said De Wet.