VAT Rules On Reimbursement And Disbursement Of Expenses

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.

 

  1. 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 goods or services from the supplier;
  • The supplier should have issued the invoice in your name and you are under the legal obligation to make payment for it;
  • In case of goods, you should own the goods prior to making the onward supply to the other party.

The principles stated above should be used as indicators to analyze whether a recovery of expense amounts to a reimbursement or disbursement. The taxpayer, should, however consider all the facts and circumstances of the transaction holistically to arrive at a decision.

 

Q: How can Spectrum Auditing help you in this regard?

Spectrum Auditing team is well equipped to advise and take care of your requirements of Value Added Tax (VAT). Our passion and heart lie in serving the clients and we aim to keep client’s satisfaction as our primary motto. We are registered Auditors under the Ministry of Economy UAE and also registered Tax Agent from Federal Tax Agency UAE, Dubai providing dedicated Audit, Accounting, Tax services, Financial Advisory and Business Advisory Services complying regulatory requirements.

 

Reach us to have a frills free life in your journey in UAE. We at Spectrum will assist you in taking care of all the procedures involved in the VAT process. Call us today for any kind of assistance at +971 4 2699329 or email us at info@spectrumaccounts.com to get all your queries addressed. Spectrum is your partner in your success.

 

  
  Article by Akshitha Ramesh, CA.  
  Email info@spectrumaccounts.com to get all your VAT 
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