What is Reimbursement vs Disbursement as per UAE VAT Rules?

Every day, your business have to incur and pay a lot of costs and expenses. Pay money on behalf of your customers.

When you pay something on behalf of a customer, you can either think of it as a disbursement or a reimbursement. They're both the same, right?

Well, according to the dictionary, yes.

But, no, not when it comes to UAE VAT liability.

When you, as a service provider or agent, pay on your client's behalf and subsequently bill them to recover these expenses, there are two types of expense recovery procedures:

• reimbursement, and
• disbursement

The VAT treatment will be determined by whether the expense recovery is a Reimbursement or a Disbursement.

Let's look more closely at these rules. Let’s try to better understand what they mean for VAT.

What do Reimbursement and Disbursement mean?

"Reimbursement" relates to the reimbursement of expenses incurred as a principal.

Whereas "disbursement" refers to the reimbursement of payments made on another's behalf.

How to Assess Reimbursements vs Disbursements per UAE VAT?

The UAE Federal Tax Authority has issued an explanation document known as VATP013. The document outlines the rules for reimbursements and disbursements. And the associated VAT liabilities.

The principles of Reimbursement are:

• Contract for the supply of goods or services should be in your name and capacity;
• Goods or services received by you from the supplier;
• Ownership of the goods should be with you prior to making the onward supply to the other party;
• The supplier invoice should be in your name and you are under the legal obligation to pay for it

The principles of Disbursement are:

• The recipient of goods or services should be the other party;
• The responsibility to pay for the goods or services shall be of another party;
• The invoice or tax invoice should be in the name of the other party;
• The other party should authorize you to pay on his behalf;
• The payments to supplier should be separately shown on your invoice and should recover the exact amount paid to the supplier;
• The goods or services paid for should be added to the supplies you make to the other party

You have to follow the above rules to evaluate if your expenditures or payments are eligible for reimbursement. You have to take into account all relevant information and circumstances.

Treatment of Reimbursement and Disbursement Expenses

Think about it this way.

Reimbursement of expense is subject to VAT since it is part of the consideration for the supply.

Disbursement of expense does not constitute a supply and is therefore not subject to VAT.

Your business will have to pay costs, or expenses, to sell goods or services to customers. All these costs or expenses are treated as the cost of goods or services. Recovering these costs will amount to reimbursement. VAT will be payable on it.

Let us assess this with examples.

What are reimbursable expenses?

A customer signs a contract with a consulting firm to get a feasibility study report.

The contract also says that some out-of-pocket costs, like travel, lodging, and meals, will be covered. The consulting firm has to pay for these costs.

These costs are added to the customer's bill as "out-of-pocket expenses," as per the contract. With no markup.

The reimbursement of such expenses would be subject to the same VAT treatment as the main supply. And will be subject to VAT.

Here, the cost incurred by the consulting firm is incidental to provide the supply of services. So, they are reimbursable. And subject to VAT.

What are disbursable expenses?

Here is an example of when the subsequent recovery of the price paid towards the license renewal will be considered a Disbursement. And will be exempt from VAT.

A consultancy firm renews a customer’s trade license, and while doing so pays the license and other fees to the licensing authority, on behalf of its customer

This is because the consultant firm served as the customer's representative or agent in renewing the license.  The firm recovers the amount paid as a fee, with no markup.

How to comply with UAE VAT laws for Disbursements?

• Assess your business transactions with Vendors and Customers
• Consult tax advisors to assess how you recharge your costs to your customers
• Discuss with your Vendors and customers and amend the contracts/ agreements
• Treat reimbursable expenses as taxable
• Treat only reimbursable expenses as exempt from tax