Disbursements vs. Reimbursements: A Key VAT Distinction for UAE Businesses
In the course of doing business, it’s common to incur costs that are then passed on to a client. A law firm pays a court fee on behalf of its client; a marketing agency pays for a photographer for a client’s photoshoot; a consultant pays for their own flight to visit a client’s site. In each case, the business recharges the cost to the client. From a commercial perspective, this seems straightforward. From a VAT perspective, however, it is a critical point of complexity.
- Disbursements vs. Reimbursements: A Key VAT Distinction for UAE Businesses
- What is a Disbursement? The Role of the Agent
- What is a Reimbursement? The Role of the Principal
- Ensuring Correct VAT Treatment with Excellence Accounting Services (EAS)
- Frequently Asked Questions (FAQs)
- Unsure About Your Recharges? Get VAT Clarity.
The UAE VAT Law makes a crucial distinction between two ways of passing on costs: as a **disbursement** or as a **reimbursement**. These two terms, which may seem interchangeable in everyday language, have completely different VAT treatments. Misclassifying a reimbursement as a disbursement (or vice versa) is one of the most common errors businesses make, often leading to under-collected VAT and potential penalties from the Federal Tax Authority (FTA).
This guide will provide a clear and definitive explanation of the difference between disbursements and reimbursements. We will outline the strict criteria set by the FTA and provide practical examples to help you correctly apply the rules to your client recharges.
Key Takeaways
- The Core Difference: A **disbursement** is when you act as an agent, paying a cost on your client’s behalf. A **reimbursement** is when you incur a cost yourself as part of your service and recharge it to the client.
- The Golden Rule: The name on the third-party supplier’s invoice is the key determinant. If the invoice is in your client’s name, it’s likely a disbursement. If it’s in your name, it’s a reimbursement.
- VAT on Disbursements: A disbursement is passed on to the client without VAT (it is outside the scope). You also cannot recover the input VAT on the original cost.
- VAT on Reimbursements: A reimbursement must have 5% VAT added when you recharge it to your client. You can recover the input VAT on the original cost.
- Documentation is Crucial: You must maintain clear records, especially the third-party invoices, to justify your VAT treatment to the FTA. Expert VAT consultants can help establish the correct processes.
What is a Disbursement? The Role of the Agent
A disbursement occurs when you make a payment to a third party on behalf of your client, acting purely as an agent or intermediary. You are simply a conduit for the payment. The cost is ultimately the client’s, and the supply from the third party is made to the client, not to you.
For a recharge to be treated as a disbursement for VAT purposes, **all** of the following strict conditions must be met:
- The client, not you, was the recipient of the goods or services.
- The client was responsible for paying the third-party supplier.
- You were authorized by your client to make the payment on their behalf.
- The third-party invoice was issued in the **client’s name**.
- You passed on the exact amount of the cost to your client without any markup.
- The payment is shown separately on the invoice you issue to your client.
VAT Treatment of a Disbursement
- Output Tax: The amount you charge to your client is **outside the scope of VAT**. You do not add 5% VAT to this charge.
- Input Tax: You **cannot** recover the input VAT on the third-party supplier’s invoice, because the supply was not made to you. Your client can recover the VAT, provided they have the supplier’s tax invoice (which is in their name).
Classic Example: A law firm pays a AED 500 court filing fee on behalf of its client. The court invoice is issued to the client. The law firm shows a separate line item on its invoice to the client for “Court Fees: AED 500.” This AED 500 is outside the scope of VAT.
What is a Reimbursement? The Role of the Principal
A reimbursement occurs when you incur costs yourself in the course of providing your own services to a client, and you then recharge these costs. In this case, you are the recipient of the supply from the third party, and you are acting as a principal.
A recharge is treated as a reimbursement if the third-party supplier’s invoice is in **your name**. The cost is considered an input to your own business, which you then incorporate into the total value of the service you provide to your client.
VAT Treatment of a Reimbursement
- Output Tax: The amount you recharge to your client is considered part of the total payment for your services. You **must add 5% VAT** to this charge. This applies even if you don’t add a markup.
- Input Tax: You **can** recover the input VAT on the third-party supplier’s invoice (subject to normal recovery rules), because the supply was made to you.
Classic Example: A consultant based in Dubai flies to Abu Dhabi for a client meeting. The airline ticket costs AED 1,000 + 50 VAT. The tax invoice is in the consultant’s company name. The consultant recharges this cost to the client. They must show “Flight Costs: AED 1,000” on their invoice and charge 5% VAT on it (AED 50). The consultant can recover the original AED 50 of input VAT from the airline ticket.
| Aspect | Disbursement (Agent) | Reimbursement (Principal) |
|---|---|---|
| Your Role | Agent, paying on client’s behalf. | Principal, incurring a cost yourself. |
| Recipient of Supply | Your Client | You / Your Business |
| Third-Party Invoice In… | Client’s Name | Your Name |
| VAT on Recharge to Client | Outside the Scope (No VAT) | Standard-Rated (Add 5% VAT) |
| Input VAT Recovery | No | Yes |
Ensuring Correct VAT Treatment with Excellence Accounting Services (EAS)
The distinction between disbursements and reimbursements is a common area of error and a focus for FTA audits. EAS provides expert advisory to ensure your billing processes are fully compliant.
- VAT Transaction Advisory: Our VAT consultants will review your recharging practices and provide clear guidance on whether costs should be treated as disbursements or reimbursements.
- Process and Policy Review: We help you establish clear internal policies and invoicing procedures to ensure costs are handled correctly and supported by the right documentation.
- VAT Return Filing: We manage your VAT return filing, ensuring that output tax is correctly calculated on reimbursements and that input tax is correctly claimed.
- FTA Audit Support: If you face a tax audit, we can defend your VAT treatment of recharges, backed by a thorough understanding of the law and proper documentation.
Frequently Asked Questions (FAQs)
It is still a **reimbursement**. The key factor is the name on the invoice, not whether you add a markup. Because the supply was made to you, you must treat the recharge as part of your taxable supply to the client and add 5% VAT.
This is almost always a reimbursement. The Google Ads account and the invoices are typically in the agency’s name. The agency is the recipient of the advertising service from Google. Therefore, when the agency recharges the ad spend to the client, it must add 5% VAT.
For a disbursement, you should list it as a separate line item and clearly state that it is a disbursement and outside the scope of VAT. For a reimbursement, you should list it as a line item along with your other fees, and it will be included in the subtotal on which VAT is calculated.
These are reimbursements. The employee incurs the cost on behalf of your company, not on behalf of the client. Your company reimburses the employee. When you recharge this cost to the client, it is part of your supply to them and is subject to 5% VAT.
Yes, typically. Customs duties are a tax levied on the importer of record (your client). When you pay this on their behalf, you are acting as an agent. The charge is a disbursement and outside the scope of VAT, provided the official customs declaration is in your client’s name.
If the invoice is in your name, you cannot treat the recharge as a disbursement. You must treat it as a reimbursement and charge VAT to your client. You should explain this to your client beforehand so there are no surprises.
No. The treatment is determined by the specific facts of the transaction, primarily who the recipient of the supply is, as evidenced by the tax invoice. You cannot choose the treatment that is most convenient.
This is a classic disbursement. The trade license is for the client, and the government fee is their liability. The invoice/receipt from the economic department will be in their name. You pass on the exact cost without VAT.
For Corporate Tax, the net effect is often the same. For a reimbursement, the recharged income and the original cost will both be recorded, netting out (excluding any markup). For a disbursement, neither the income nor the expense is recorded in your profit and loss statement. The key difference is purely for VAT.
The biggest risk is incorrectly treating a reimbursement as a disbursement. If you do this, you will fail to charge 5% VAT to your client. If the FTA discovers this during an audit, you will be liable for the underpaid output tax yourself, plus penalties.
Conclusion: The Decisive Role of Documentation
In the nuanced world of VAT, the distinction between a disbursement and a reimbursement is a perfect example of why substance—and documentation—matters. The key to compliance is to always ask: “Who was the supply made to?” The answer to that question, proven by the name on the third-party tax invoice, will dictate the correct VAT treatment. By establishing clear processes and maintaining meticulous records, you can confidently navigate this distinction and ensure your business remains fully compliant.
Unsure About Your Recharges? Get VAT Clarity.
Contact Excellence Accounting Services for an expert review of your disbursement and reimbursement procedures.
