VAT aspects of non-executive directors’ fees

As a general principle, where an amount is paid to an individual (for example a non-executive director), regarded as independent under common law but not for purposes of the Fourth Schedule to the Act, the individual must levy VAT on those services supplied to their client, but only if that person is (or is required to be) registered as a vendor under the VAT Act. The aforementioned scenario rarely arises in practice though. However, PAYE at the applicable rate, must be withheld from the VAT exclusive amount charged by the individual to their client.

Where an individual is not regarded as independent under common law, the supply of services would likely fall outside the definition of an ‘enterprise’ and no VAT would therefore be applicable. For example, there is no VAT on a salary purely because of the proviso excluding such amounts, being ‘remuneration’, from the concept of an ‘enterprise’. The debate essentially turns around the concept of what is regarded as ‘remuneration’ for purposes of the Fourth Schedule to the Act as it pertains to independent contractors and the disconnect in the VAT Act that only deals with the concept of an independent contractor in a common law context.

Although no further clarity or information is provided on the proposed investigation, it can be expected that the definition of ‘enterprise’ in the VAT Act will be refined to hopefully put the issue to bed as to whether VAT registration would be required for a non-executive director that is subject to PAYE under the supervision and control tests in the Fourth Schedule to the Act, but still remains independent under common law.