Reimbursements vs. Disbursements in UAE VAT: How to Recharge Client Costs Correctly

From time to time, you will incur various costs for the benefit of your client. If your business is a law firm, you may pay for court fees. Trading businesses often send employees to different cities or even countries for client meetings. A consultancy firm may engage the services of specialists. A contract manufacturer may procure special raw materials needed to produce something that meets the client’s unique expectations.

Where these costs are recovered from the client, the VAT treatment depends on whether the recovery is a reimbursement or a disbursement.

In this article, we will discuss the meaning of reimbursements and disbursements, how these two differ from each other, how to prepare invoices for both, their UAE VAT implications, and what businesses often get wrong about such expenses.

Why the Distinction Between Reimbursement and Disbursement Matters

Reimbursements and disbursements have different UAE VAT treatments. Both represent expenses incurred to serve the client and the subsequent recovery.

But, as per the public clarification issued by the Federal Tax Authority (FTA), reimbursements fall within the scope of VAT and generally form part of the payment for the main supply, so they follow the same VAT treatment as that supply. A qualifying disbursement is outside the UAE VAT scope.

So, you may charge output VAT on reimbursements but never on disbursements.

An invoice for reimbursement will have the same VAT treatment as the main supply. If the main supply is standard-rated, the reimbursement will be subject to 5% VAT. If it is zero-rated, the reimbursement will also be zero-rated. If it is VAT exempt, the reimbursement will also be VAT exempt.

In contrast, disbursements are outside the scope of VAT, and hence, you do not need to charge any VAT on these invoices.

For reimbursable expenses, your business may recover eligible input VAT. But for qualifying disbursement expenses, any eligible input VAT paid is generally recoverable by the client, not by the business that merely made the payment for the client.

Mistaking a reimbursement for a disbursement may sometimes mean not charging VAT when you should have. This will shrink your margins. On the other hand, mistaking a disbursement for a reimbursement may mean overcharging your client. If the mistake resulted in VAT being incorrectly charged and requires a reduction in output tax, a tax credit note should be issued. You must also correct the VAT reporting in accordance with the applicable rules.

Want to learn when and how to issue tax credit notes? In a previous article, we covered the correct tax credit note format, the relevant deadlines, and how credit notes impact VAT returns.

What Is a Disbursement?

A disbursement refers to the recovery of a cost where you essentially just facilitated the transactions. Some of the conditions for a cost to be called a disbursement are:

1. Client should be named as the recipient on the supplier invoice
2. Client should be responsible for making the payment
3. Client must authorize you to make the payment
4. The goods or services paid for are clearly additional to the supplies you make to the client
5. You do not apply any mark-up
6. Cost is separately itemized

Where these indicators, considered together with the overall facts and circumstances, show that you acted as the client’s agent, the recovery would generally qualify as a disbursement and no VAT should be charged on the recovery. Some examples of disbursement of expenses would be recovering government fees, court filing fees, and visa and license fees, provided the FTA’s conditions for a disbursement are met.

What Is a Reimbursement?

Reimbursement refers to the recovery of the cost your business incurs to purchase goods or services used to serve the client. The client may not want these goods or services, but your business may need them to produce a different supply desired by the client. Or you may have applied a mark-up to these items. Some of the key indicators of a reimbursement transaction are as follows:

1. Your business is the recipient
2. The supplier invoice was made in your own name
3. You contracted for the goods or services in your own name and capacity
4. You received the goods or services from the supplier and were legally obligated to pay for them
5. In the case of goods, you owned them before making the onward supply

Under the UAE VAT law, the VAT treatment for reimbursements is the same as the primary supply. Some examples of reimbursements would be travel and accommodation expenses, subcontractor fees, logistical costs, and software licenses purchased while serving the client.

As per the UAE VAT reimbursement definition, the application of a mark-up to the costs constitutes reimbursement unless the facts and circumstances of the transaction suggest otherwise.

The Test: How To Differentiate Between Disbursements and Reimbursements?

Let’s look at some useful questions that can help determine whether an expense recovery is a disbursement or a reimbursement. These are indicators rather than a standalone checklist, and the facts and circumstances should also be considered.

1. Did your client authorize the expense?
   If your client was the principal and you were acting as their agent, meaning the decision to incur expenses and customize the order rested with the client, the transaction can qualify as a disbursement.
2. Whose name was on the invoice?
   An expense recovery can be a disbursement only if the client was named as the recipient on the supplier invoice.
3. Whose legal obligation was it to pay?
   In disbursements, the responsibility to pay rests with the client, and the business simply facilitates the payment.
4. Did you consume the goods or services?
   If your business consumes the goods or services, the recovery would generally not qualify as a disbursement.
5. Did you apply a mark-up to the cost?
   Under the current UAE VAT regime, if you include a mark-up in the amount recovered for the underlying cost, the recovery does not qualify as a disbursement. This would generally be treated as a reimbursement.

Here’s a simplified summary of the differences between reimbursement and disbursement.

Does your business need to recover some unusual or complex costs that do not cleanly fit into either category? Consider consulting Skrooge’s tax experts. We can help you understand the right accounting treatment of any kind of commercial transaction.

How to Prepare Invoices for Disbursements and Reimbursements?

The key difference between invoices raised for disbursements and those raised for reimbursements is the VAT treatment. On reimbursement invoices, you need to apply the same VAT rate as the primary supply.

The picture below shows what a reimbursement invoice looks like in our template. Your business incurred AED 5,000 of travel and accommodation costs before VAT. If the reimbursement follows a standard-rated main supply, 5% VAT is applied, resulting in a total charge of AED 5,250.

On the other hand, if your cost recovery is classified as a disbursement under UAE VAT rules, you should not apply any VAT. Suppose your business assists a client in obtaining a trade license from Meydan Free Zone, and the amount paid on the client’s behalf is AED 12,500. Then, the disbursement invoice you raise should look something like this:

There’s no VAT applied, not even 0%, so the invoice was raised for the exact amount of AED 12,500.

If you are raising a composite invoice for all supplies and cost recoveries, you must include the reimbursable expenses as taxable line items and show qualifying disbursements separately without charging VAT on them. Let’s see how that would look.

There are 4 costs for which the business is raising the above invoice. Out of the 4, travel & accommodation and subcontractor fees are reimbursements. Visa cost and trade license are disbursements. The 5% VAT is applied only to travel & accommodation and subcontractor fees, and these are the only 2 line items in the tax summary. No VAT is applied to visa costs and trade licenses, and they are not included in the tax summary either.

What Businesses Get Wrong About Reimbursements and Disbursements?

Some of the common mistakes businesses make when recovering costs are as follows:

1. Applying mark-up to disbursements
   Applying a mark-up means the recovery does not meet the FTA’s condition for a disbursement and would generally be treated as a reimbursement, subject to the facts and circumstances of the transaction.
2. Classifying goods consumed or services received by the business as disbursements
   If your business received the goods or services as principal, the related recovery would generally be treated as a reimbursement.
3. Incorrect VAT treatment
   Reimbursements mirror the tax treatment of the related product supplied. No VAT is applied to disbursements. Any other VAT application would be incorrect.
4. Claiming input VAT recovery on disbursements
   Businesses may misinterpret the ‘no VAT on disbursements’ rule as 0% on such expenses. However, that would mean misclassifying disbursements as zero-rated supplies and adding them to the list of transactions for which input VAT recovery can be claimed. In fact, disbursements are outside the scope of UAE VAT, and hence, you cannot recover input VAT on these supplies.
5. Miscalculating VAT
   When businesses add a mark-up to a cost recovery, the VAT (if any) must be applied to the original cost as well as the mark-up.

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Conclusion

If you make a purchase as an agent of the client, you can recover it as a disbursement. However, if you made the purchase as a principal deciding which goods or services to consume to ultimately deliver the supplies requested by the client, you must recover it as a reimbursement. If a mark-up is applied, the recovery does not meet the FTA’s condition for disbursement treatment and would generally be treated as a reimbursement.

Once the correct reimbursement or disbursement treatment has been determined, invoicing software can automate the appropriate VAT treatment and accounting entries. Skrooge’s invoice automation tool is designed to apply configured VAT treatments across invoices generated through connected systems. Our invoice automation tool enables you to generate invoices aligned with your POS systems, accounting software, or payment gateways. The tool is designed to apply the appropriate VAT treatment to invoices and automate the related accounting entries. Learn more about our invoice automation tool.

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