How does the FTA Define VAT Treatment of Disbursement and Reimbursements?

In a global economic hub like the UAE, businesses incur a wide variety of costs and expenses every day. It is common for business owners to make payments on behalf of customers or clients as part of business transactions. In the UAE, the VAT treatment of disbursement and reimbursement of such expenses are not the same. Businesses need to properly understand the VAT treatment of disbursement and reimbursement of expenses for which they can seek the assistance of VAT consultants in the UAE.

For some time, confusion existed among the business owners about how the Federal Tax Authority (FTA) defines disbursements and reimbursements of expenses. However, the FTA released a public clarification (VAT P013) which has removed the confusion regarding the VAT implications. Let’s discuss these concepts in more detail to understand the implications of VAT.

A Glimpse into Disbursement V/s Reimbursement 

Businesses during a commercial transaction often incur expenses and will recover them subsequently from another party. The VAT treatment of the subsequent recovery of expenses depends on whether the recovery is a “disbursement” or “reimbursement”. The term “reimbursement” refers to the recovery of expenses that you incur as a principal.

The term disbursement, on the other hand, refers to the recovery of payments made on behalf of another person. The FTA considers the disbursement of expenses as out of scope for VAT and the reimbursement of expenses as within the scope of VAT. Tax agents in the UAE can offer more insights into the VAT implications of disbursement and reimbursement.

Determining VAT Treatment of Disbursement & Reimbursement  

To determine whether recovery is a reimbursement or disbursement, you need to establish whether you acted as principal or an agent while purchasing the goods or services. If you acted as an agent, the recovery will be a disbursement. A disbursement doesn’t constitute a supply and therefore is out of scope for VAT in the UAE. For example,  ABC LLC makes a payment to a supplier on behalf of client PQR LLC and then invoices PQR LLC. It’s a case of disbursement and out of scope of VAT.

On the other hand, if you have acted as a principal, the recovery would be treated as a reimbursement. A reimbursement is viewed as a part of the consideration for the supply and follows the same VAT treatment as the main supply. In the case of reimbursement, the supply takes place directly between the supplier and the person recovering the cost.

For example, ABC LLC strikes a contract with PQR LLC to provide marketing services to PQR LLC. PQR LLC incurs costs in its name while providing these services and then recovers the costs from PQR LLC as per the terms of the contract. It’s a case of reimbursement and the expenses recovered by ABC LLC from PQR LLC will follow the VAT treatment of the main supply.

Principles to Determine Disbursement of Expenses 

The FTA has set out certain principles that will help businesses determine whether the recovery of an expense from another party meet the conditions for being considered as a disbursement. The conditions are as follows:

1. The other party must be the recipient of goods/services
2. The other party must be responsible for making the payment to the supplier
3. The other party must receive an invoice or tax invoice in its own name from the supplier
4. You must be authorised by the other party to make the payment on their behalf
5. The goods or services paid for should be added to the supplies you make to the other party
6. 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 to Determine Reimbursement of Expenses 

1. The following principles will help you determine whether the recovery of expenses will be treated as reimbursement:
2. You should have contracted for the supply of goods or services in your own name and Capacity
3. You should have received the goods or services from the supplier
4. The supplier should have issued the invoice in your name and you are under the legal obligation to make payment for it
5. In the case of goods, you should own the goods before making the onward supply to the other party

The principles listed by the FTA should only be used as indicators to assess whether recovery of expense is tantamount to reimbursement or disbursement. The taxpayer, should, however, consider all the facts and circumstances of the transaction holistically to reach a decision. Consulting with VAT consultants in Dubai will make things easy for you.

Get Help from the Best VAT Consultants in Dubai 

Based on the FTA’s clarification on VAT on disbursements and reimbursements, the UAE businesses should review theirs recharges of costs to understand whether they have been treated correctly. It would be difficult for many businesses to make the assessment correctly. Such businesses can seek the help of the best VAT consultants in Dubai such as Jitendra Chartered Accountants (JCA).

JCA has a team of highly qualified professionals who are the best tax agents in Dubai, UAE. We offer a one-stop solution for the requirements of the businesses by providing the best VAT consultancy services in Dubai. Our bespoke services such as VAT return filing, VAT registration and appeal on VAT penalties make the VAT procedures simplified for the businesses.