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On a day-to-day basis, businesses incur a lot of costs and expenses. Making payments on behalf of consumers and clients as part of a business transaction is a typical practice. Disbursement and reimbursement of expenses are treated differently under the UAE VAT regime. The VAT handling of reimbursement and disbursement of expenses has been fraught with ambiguity. As a result, we must first understand these concepts before we can comprehend their VAT implications.
When you, as a service provider or agent, pay on your client's behalf and subsequently bill them to recover these expenses, there are two types of expense recovery procedures:
The VAT treatment will be determined by whether the expense recovery is a Reimbursement (VAT-free) or a Disbursement (VAT-free) (not VATable).
Let's take a closer look at these principles to better comprehend the VAT implications.
The phrase 'reimbursement' relates to the reimbursement of expenses incurred as a principal, whereas "disbursement" refers to the reimbursement of payments made on another's behalf.
The Federal Tax Authority (FTA) issued VATP013, a public explanation that establishes specific guidelines for analyzing certain expenses that are reimbursable or disbursable.
The principles of Reimbursement are:
The principles of Disbursement are:
The principles outlined above should be used as a guideline for determining whether expenses are reimbursable or not. To reach an appropriate decision, all facts and situations must be considered.
Reimbursement of expense is subject to VAT since it is part of the consideration for the supply, whereas disbursement of expense does not constitute a supply and is therefore not subject to VAT.
In general, certain costs incurred by a business to offer goods or services are included in the total costs. If the business recovers such costs from customers under any name, the nature of the costs remains the same, and so the recovery of such costs will be considered as Reimbursement and thus is subject to VAT.
Consider the following scenario. A consultancy firm enters into a contract with a customer to provide a feasibility study report. Assume that the contract also includes provisions for reimbursement of some out-of-pocket expenses, such as travel, lodging, and meals. Such charges are incurred by the consultancy firm and recovered from the customer as out-of-pocket expenses separately in its invoice as per the contract conditions, without any mark-up. The reimbursement of such expenses would be subject to the same VAT treatment as the main supply, and so would be taxable.
In contrast, where a consultancy firm pays certain expenses on behalf of its customers and serves as their agent, the recovery of such charges is recognized as a disbursement and is thus exempt from VAT. For example, if a consultancy firm acts as a registered agent and pays a fee to the licensing authority and renews a trade license on behalf of its customer, the subsequent recovery of the price paid towards the license renewal will be considered a Disbursement and hence will be exempt from VAT. This is because the consultant firm served as the customer's representative in renewing the license and solely recovers the amount paid as a fee, with no mark-up.
Businesses must assess their cost recharges in a timely manner to see if they were correctly treated as disbursements or reimbursements in compliance with the principles outlined above. Businesses should interact with suppliers/customers to agree on amending existing agreements and sending credit notes for any necessary changes if any such transactions have been treated wrongly from a VAT standpoint.
For more assistance in managing your VAT obligations, visit our VAT Advisory page
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