Expense recovery is a common operation in business transactions. A party may incur expenses and subsequently recover such expenses from another party. The recovery of expenses depends on whether the recovery is a “disbursement” or “reimbursement”. To determine whether a recovery is a disbursement or reimbursement, it is to establish whether you have acted as a principal or an agent in undertaking the expense.
It is the recovery of expenses incurred on behalf of another party. In other words, where you have acted as an agent, the recovery would generally amount to a disbursement.
It is the recovery of expenses that you incur on your own behalf. In other words, where you have acted as a principal, the recovery would generally amount to a reimbursement.
How to differentiate between Disbursements & Reimbursements?
The following principles will help to determine whether the recovery of an expense from another party can be classified as a disbursement or reimbursement.
Principles of 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 of 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.
What are the VAT treatments in the UAE for Disbursements & Reimbursements?
Disbursement VAT treatment
A disbursement does not constitute a supply as per VAT Decree Law and is, therefore, not subject to VAT i.e., it is out of scope. A disbursement is a payment that your business makes on behalf of a client but which you later invoice the client for.
Example
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 VAT treatment
A reimbursement falls within the scope of VAT as per VAT Decree Law and is considered to be a part of consideration for the supply and follows the same VAT treatment as the main supply.
Example
Company A entered into a contract with Company B to provide marketing services. The contract stipulates that Company A is eligible to reimburse the expenses from Company B. Company A incurred the expenses in its 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.
Creative Zone Tax & Accounting is a Federal Tax Authority (FTA) approved Tax Agency, and can help you with all your VAT requirements. To know more about Reimbursement and Disbursement write to us at [email protected].
