We have seen a lot of misunderstanding towards the segregation between reimbursements and disbursements of expenses. It is very important to be aware if the expense a company is incurring is a reimbursement expense or a disbursement expense in order to maintain proper VAT treatments.
What is a reimbursement expense?
The term “reimbursement” refers to recovering an expense you have paid for a good or service that has been used by you, which means that the supplier’s invoice is in your own name. As per the Federal Tax Authority rules and regulations, reimbursements are taxable at the standard rate of 5%.
Generally, expenses incurred by a company to supply goods or services to customers are included in the pricing of the contract, in which this contract price is supposedly taxable, which makes the reimbursement expense taxable as well. For example, an external audit firm has entered into a contract to perform a financial audit on company A, and they have agreed that all out of pocket expenses paid by the audit firm are to be paid back by company A. Company A is in another city and therefore, the audit firm had to book a hotel in company A’s city for a while until they complete the audit. After the audit finished, the audit firm includes the amounts they have paid for the hotel in the final invoice issued to the company A, which
should be taxable at 5%.
Principles of reimbursement
• You should have contracted for the supply of goods or services should be in your name and capacity;
• You should have received the goods or services from the supplier and not any other party;
• Your name should be clearly written on the invoice issued from the supplier;
• Legally, you should pay for the goods or services mentioned on the invoice; and
• If the supply is goods, those goods must be in your ownership.
What is a disbursement expense?
The term “disbursement” refers to recovering a payment that you have made on behalf of other parties. In other words, this payment that you have made is in return for a good or service, but not incurred by you. For example, company A have purchased goods from a supplier worth AED1,000 + 5% VAT, and company A requested company B, to make the payment on its behalf. In that case, the amount that company B will get back from company A for this transaction will be in return for no good or service, and therefore, out of the scope of VAT, providing that no company B have charged no mark-up on the disbursement. Moreover, the invoice that company B will receive from the supplier will be in addressed to company A and not company B. In this case, only company A will be able to claim the VAT paid by company B to the supplier. This means that when company B makes a total payment of AED 1,050 inclusive of VAT to the supplier on behalf of company A, it will then issue a non-taxable invoice totaling AED 1,050 and then company A will claim back the VAT that company B has paid to the supplier through the VAT report submitted at the end of the corresponding VAT period.
Principles of disbursements
• 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’s name should be addressed in the tax invoice issued from the supplier;
• The other party should be authorizing you to make the payment on their behalf;
• The goods or services paid for should be clearly addressed additional to the supplies you make to the other party; and
• The payment should be separately shown on the invoice and you should recover the same amount paid to the supplier without any mark-up or payment fees.
As mentioned in the beginning of this article, it is always important to know the reason of the payments or payment recoveries being made, because based on such analysis, different VAT treatments may apply. Reimbursement and disbursement are both payment recoveries, but one falls within the scope of VAT and the other does not, and that is completely decided by the analysis made on the payment recovery.
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