[Question] VAT input on Legal Fees not deducted for Income Tax

[J7J]

Hi,

I have a client that incurred legal fees to obtain legal advice on a franchise agreement that they have previously entered into and to discuss a possible exit from the agreement.

For purposes of income tax, I have indicated that these legal fees are not deductible for income tax (is this correct?).

Now, by indicating that it is not a income tax deductible expense, does that automatically disqualify this expense for VAT input deduction as well?

Any thoughts on this?

[Christel]

Hi there, I'm not an expert on the matter, but my thoughts would be firstly why did you not include it for income tax dedution? And secondly for VAT, I would say yes, if the invoice was made out to the correct VAT entity.

[Dave A]

It's always a good idea if you can to get legal advice on the collection of monies owed by debtors, and keep trivial other stuff (like the one you describe) as a minor aside while you're there.

You can never get too much good legal advice on the collection of monies.

[CLIVE-TRIANGLE]

Hi,

I have a client that incurred legal fees to obtain legal advice on a franchise agreement that they have previously entered into and to discuss a possible exit from the agreement.

For purposes of income tax, I have indicated that these legal fees are not deductible for income tax (is this correct?).

You are correct. Unless it satisfies Sec 11(c); based on the info most likely not. On the other hand, depending on the nature you might capitalise it as part of the franchise cost, much as you might with property.

Now, by indicating that it is not a income tax deductible expense, does that automatically disqualify this expense for VAT input deduction as well?

Any thoughts on this?

Not always. Entertainment is deductible, but the VAT not, there are many other examples. I am not aware of a provision that would prevent you from claiming the input Vat.

[J7J]

Thank you for the responses!

[J7J]

Not always. Entertainment is deductible, but the VAT not, there are many other examples. I am not aware of a provision that would prevent you from claiming the input Vat.

Hi,

The following leads me to think that the VAT should not be claimed (specifically par. a): (extracted from VAT 404 guide)

To qualify as input tax, three requirements must be met, namely –
a) the goods or services supplied must be acquired by the vendor wholly or partly for consumption, use or supply in the course of making taxable supplies; and
b) VAT at the standard rate must have been charged on the taxable supply (or “second-hand goods” must have been acquired under a non-taxable supply and paid for by the purchaser (refer to paragraph 7.4 for more details)); and
c) the appropriate documentation16 must be held by the vendor, as follows:
o Standard rated supplies – a valid tax invoice.
o Second-hand goods bought under a non-taxable supply – sufficient records must be maintained by the vendor deducting the input tax as per form VAT 264 and section 20(8) of the Act. (Refer to also paragraph 7.4);
o Importation of goods – a customs bill of entry for example, the SAD 500 (and any additional SAD document that might be required) or other prescribed customs document, including the relevant proof of payment made to Customs.

[dellatjie]

Good afternoon,

I have a similar question:

1)Is debt collection fees deductible for income tax purposes? The general rule would be, has it been incurred in the production of income. In my opinion, no income would be earned in these cases should you not have incurred the expense.
2)In which cases are legal fees not deductable for income tax purposes? I see in some financial statements that legal fees are automatically being added back on the tax computation, which leads me to believe that legal fees are deductable only in very few cases or not at all?

[Justloadit]

It may be legal fees in defending an action.

[sterne.law@gmail.com]

As earlier, legal fees may sometimes be a capital outlay.
The key is to determine if it's an expense to generate revenue or not.

[Dave A]

2)In which cases are legal fees not deductable for income tax purposes?

Drafting of partnership agreements is certainly one of them.

I see in some financial statements that legal fees are automatically being added back on the tax computation, which leads me to believe that legal fees are deductable only in very few cases or not at all?

Each instance should be examined and judged on its merits.