Q: What is this clarification about? This Public Clarification VATP013 discusses the VAT principles for differentiating between a disbursement and a reimbursement, and the VAT treatment that should be applied to the same.   Q: What are consideration, reimbursement and disbursement?

• Consideration is defined as “all that is received or expected to be received for the supply of goods or services, whether in money or other acceptable forms of payment”
• Reimbursement refers to the recovery of expenses that you incur as a principal.
• Disbursement refers to the recovery of payments made on behalf of another person.

  Q: What is the VAT treatment? In commercial transactions, a person may incur expenses and subsequently recover such expenses from another party. The VAT treatment of the subsequent recovery of expenses depends on whether the recovery is tantamount to a “disbursement” or “reimbursement”.

• Disbursement of expenses is out of scope of VAT
• Reimbursement of expenses falls within the scope of VAT.

  Q: How to determine whether a recovery is disbursement and reimbursement? Determine whether you have acted as a principal or an agent in purchasing the goods or services.

1. Disbursement – Out of scope for VAT

• Where you have acted as an agent, the recovery would generally amount to a disbursement.
• A disbursement does not constitute a supply and is, therefore, not subject to VAT.
• Disbursement is a payment that your business makes on behalf of a client but which you later invoice the client for.

  Example: If Company A procured group medical insurance from a local insurance company and received an invoice directly from the insurance company. Company A requested Company B to make the payment on its behalf. The subsequent recovery of the amount by Company B from Company A will amount to a disbursement, and would not be subject to VAT. Company A should receive a Tax Invoice addressed to it from the insurance company, and should recover the input tax through its UAE VAT return, subject to the normal input tax recovery rules.  

2. Reimbursement – within in the scope of VAT

• Where you have acted as a principal, the recovery would generally amount to a reimbursement.
• A reimbursement is considered to be a part of consideration for the supply and follows the same VAT treatment as the main supply.

  Example: If Company A entered into a contract with Company B to provide marketing services. The contract stipulated that Company A would be eligible to reimburse the expenses from Company B. Company A incurred the expenses in its own name and subsequently recovered the amounts from Company B as per the terms of the contract. The recovery of expenses from Company B would follow the same VAT treatment as that of the main supply.   Q: What are the principles that further help in determining whether the recovery of an expense from another party satisfies the conditions for being classified as a disbursement or reimbursement? Principles for Disbursement:

• The other party should be the recipient of the goods or services;
• The other party should be responsible for making the payment to the supplier;
• The other party should have received an invoice or tax invoice, as the case may be, in its own name from the supplier;
• The other party should have authorized you to make the payment on his behalf;
• The goods or services paid for should clearly be additional to the supplies you make to the other party;
• The payment should separately be shown on the invoice and you should recover the exact amount paid from the supplier, without a mark-up.

  Principles for Reimbursement:

• You should have contracted for the supply of goods or services in your own name and capacity;
• You should have received the