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.
- 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.
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.
- 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.
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?
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Article by Akshitha Ramesh, CA. Email [email protected] to get all your VAT queries replied.