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DISBURSEMENT RECOVERY ACCOUNT

The Receiver of Revenue requires that you separate the Output VAT that you charge your clients on valid VAT Invoices, from the Input VAT that you are claiming back from valid VAT Invoices that you have received from your creditors.

Output VAT is determined from fee transactions (income) and disbursement transactions (expenditure that you have incurred on your clients behalf which you will recover from them). 

Input VAT is determined from disbursements (expenditure you have incurred on your clients behalf and have passed on to them) as well as normal operating expenditure.  

Disbursements is classed as both Output VAT (you are charging the client) and Input VAT (you are claiming from the creditor) due to the invoices received from creditors (e.g. Messengers, Tracing Agents, etc).  The invoices received are made out to you, the Attorney and not to your client.  The Attorney is then entitled to the Input VAT. 

This is further complicated as Attorneys receive one invoice for many clients and therefore you cannot forward the invoice directly to all those clients, as not all the expenses on the invoice will pertain to them. The invoice also will not be made out to these clients and therefore they will not be able to claim the Input VAT anyway.  

In order for your client to be able to claim this VAT Input, the invoice must be made out to the client themselves with the appropriate requirements as set out by the Receiver of Revenue. 

The Receiver of Revenue requires that if your firm is registered for VAT, you must either charge your clients VAT or forward the disbursement invoices to them so that they can claim the Input VAT.  For the above reasons this is not viable, however, if you don’t charge Output VAT for these expenses then they will not be able to claim the VAT Input. 

To perform these tasks correctly on receipt of the Disbursement invoice you must use the Creditors invoice program to debit the expense account (e.g. Tracing Fees) and credit the Creditors account (the VAT input is taken care of). Then in the Disbursements program you need to Debit the Matter and credit the expense account (e.g. Tracing Fees) (the Output VAT is taken care of). As you can see the expense account (Tracing Fees) has a debit and credit and therefore the balance on that account has not changed. 

Due to the huge volume of disbursements attorneys receive, LegalSuite has made this a one entry task per transaction instead of two as it was simpler for our clients to operate and implement.  

We have thus developed a Disbursement Recovery account which reflects both the income and expense portion of a disbursement and subsequently balances, both the Input and Output VAT.  

The disbursement recovery account is an internal account and must not be posted to by anyone. The reason it exists is solely to be able to reconcile the VAT Input and VAT Output totals on the VAT SARS report. 

When posting a disbursement from a Matter to a Creditor there is no option to allocate an expense account which means that a VAT Output and VAT Input transaction is created for an expense but no expense transaction has been created. LegalSuite however automatically uses the Disbursement Recovery account to allocate a debit (VAT Input) and credit (VAT Output) expense transaction that is linked to these VAT transactions. 

Article submitted by Lisa Beswetherick.

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