In commercial transactions, a person may incur expenses and then recover these expenses from another party. The VAT UAE treatment of the amount recovered depends on whether the recovery is a “disbursement” or a “reimbursement”. The difference between these, and their VAT treatments, are explained in the Public Clarification issued by THE AUTHORITY “Disbursements and Reimbursements” (VATP013).
Disbursement refers to the recovery of payments made on behalf of another person. Disbursement of expenses is outside the scope of VAT UAE. This would include a payment that a business makes on behalf of a client but for which the client is later invoiced by the business.
The following principles help determine whether the recovery of an expense from another party satisfies the conditions for being classified as a 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 in its own name from the supplier
- The other party should have authorized the payment to be made on its behalf
- The goods or services paid for should clearly be added to the supplies made to the other party .
- The payment should separately be shown on the invoice and recovery should be of the exact amount paid, without a markup.
Reimbursement refers to the recovery of expenses incurred as a principal.
Reimbursement of expenses falls within the scope of VAT UAE. Reimbursement is considered to be a part of the consideration for the supply and follows the same VAT treatment as the main supply.
The following principles help determine whether the recovery of an expense from another party amounts to a reimbursement:
- The first party should have contracted for the supply of goods or services in its own name and capacity
- The first party should have received the goods or services from the supplier
- The supplier should have issued the invoice in the first party’s name, with the first party legally obliged to make payment for it
- In the case of goods, the first party should own the goods prior to making the onward supply to the other party.
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