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'Does a legal practice have to register for Vat?'

by , 23 February 2015
Lawyers know the law like the back of their hands, but they too can get lost in the Vat maze. Especially when it comes to which Vat rules that apply to them.

The good news is our experts at the Accounting and Tax Club are always ready to help.

This week, they got a question from a lawyer who wants to know if his legal practice has to register for Vat. He's afraid he might face SARS penalties since he's not sure if Vat registration rules apply to him.

Here's our experts' reply to his question...

These Vat registration rules apply to a legal practice

For Vat purposes, Vat law sees work that lawyers, attorneys, advocates, or anyone else in legal practice as a supply of a service.
And that means the Vat charge of 14% applies.
So if your gross income from supplying services in a legal practice in any 12-month period is more than R1 million, you must register for Vat.
Sounds straight forward right?
Not quite.
'If your practice is individually owned, a partnership, a company or a closed corporation (CC), you must register each entity for Vat,' says the Practical Vat Loose Leaf Service.
If, on the other hand, the practice is an association, each individual associate must register separately for Vat. And each one of them has to maintain separate accounting records.
If the practice is an association, it means each lawyer gets his lawyers' fees directly, but contributes a portion to the running costs and expenses of the practice.

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Are you willing to wait more than 6 months for Vat registration?

SARS has confirmed that the minute you've applied for Vat registration, you must start charging Vat. Otherwise, and the amount you've charged your customers will be regarded as being inclusive of Vat. And the Vat will come out of your pocket...

You can rely on our experts and take advantage of their experience with SARS! Learn how to stand up for your rights! The A-Z of Vat Registrations e-report will give you that.


Here's a word of warning when it comes to registering for Vat if you're a legal practice

SARS is always on the lookout for vendors who want to reduce their Vat liabilty illegally.
If your legal practice is an association, it will scrutinise it to see that you aren't trying to avoid Vat registration by splitting your company's activities between yourselves.
Here's an example: Let's say five lawyers operate a practice as an association. Their income in a 12-month period is as follows:
  • Lawyer 1 – R896 000
  • Lawyer 2 – R901 000
  • Lawyer 3 – R922 000
  • Lawyer 4 – R914 000
  • Lawyer 5 – R897 000
Their total income for the legal practice is R4.52 million. Since this income exceeds R1 million, the practice is legally liable to register for Vat.
To avoid Vat registration, the five lawyers decide to form an association.
They say for their association, each lawyer's income (even if he's a CC) comes directly to him. But each will contribute a portion towards the running costs of the practice. This includes the receptionist's salary, electricity, rent and stationery.
Using the above example, each individual's income is just under the R1 million Vat registration threshold. This means each lawyer isn't yet legally liable for Vat registration. So even though the practice grosses R4.5 million a year, it doesn't register for Vat.
SARS will look at this and apply its general anti avoidance rule. It can argue that the association has a turnover that shows each lawyer will exceed the R1 million registration threshold individually.
It can also argue that because each lawyer contributes towards the running costs, the practice is a single enterprise. And must register for Vat when it reaches the R1 million threshold.
If it concludes this, it will backdate registration to the point when you first went beyond the R1 million threshold. And then it will hit you with penalties, interest and even additional tax!
In this case, it's more than likely that SARS will levy the 200% additional tax. The lawyers could even face prosecution for going against Vat registration rules.
So if you choose to form an association, don't do it because you want to avoid Vat registration. SARS will catch you out.
Now that you know what the rules are when it comes to a legal practice, register for Vat when you qualify.
PS: If you have any tax, Vat and accounting questions, ask our experts at the Accounting and Tax Club.

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