n Business Tax and Company Law Quarterly - VAT and Remuneration : the devil is in the detail

Volume 6, Issue 3
  • ISSN : 2219-1585


Complexities often arise when a provision in one tax Act is dependent on a provision in another tax Act. The treatment of employees and office holders in receipt of 'remuneration' as defined in paragraph 1 of the Fourth Schedule to the Income Tax Act 58 of 1962 (the IT Act) under the Value-Added Tax Act 89 of 1991 (the VAT Act) is one such situation. While the rendering of services by an employee or office holder would constitute the supply of services, and accordingly an 'enterprise' activity as defined for value-added tax (VAT) purposes, an employee or office holder is deemed not to carry on an enterprise to the extent that the employee or office holder is in receipt of remuneration as defined for the purposes of employees' tax. While the definitions of 'remuneration' and 'enterprise' both provide for the exclusion of so-called independent contractors, the definition of 'enterprise' is less circumscribed. An independent contractor in receipt of remuneration may, therefore, still need to account for VAT in the circumstances discussed in the article.

The provisions of the VAT Act dealing with remuneration paid to an employee are predicated on an employment relationship, but the concepts of 'employee, 'employer' and 'employment' are not defined in that Act. This article argues that those words must derive their meaning from the Fourth Schedule to the IT Act and that an employee and employer as defined in the definition of 'remuneration' must accordingly apply for the purpose of the definition of 'enterprise'.
While the cash equivalent amount of a fringe benefit as determined under the Seventh Schedule to the IT Act that is required to be included in an employee's gross income constitutes remuneration, where the benefit is excluded from the ambit of the Seventh Schedule to the IT Act, the cash equivalent value is deemed to be nil or an exemption applies, the VAT treatment can vary significantly. These complexities are also canvassed. The article also looks at the position of fees derived by directors and concludes that a distinction must be drawn between executive directors who are in essence in an employment relationship with the company by which they are engaged as directors, and non-executive directors whose is independence and the avoidance of an employment relationship.The fees paid to the former must be ignored for VAT purposes, while the latter would need to register and account for VAT on their fees if the aggregate non-remuneration derived by them exceeds the VAT registration threshold.

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