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. (Standard Rated)
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.
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.
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 is finished, the audit firm includes the amounts they have paid for the hotel in the final invoice issued to company A, which should be taxable at 5%.
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. (Out of Scope)
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.
Company A has 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 has charged no mark-up on the disbursement. Moreover, the invoice that company B will receive from the supplier will be in address 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.
The first step to determine whether the recovery is a disbursement or reimbursement is to establish whether you have acted as a principal or an agent in purchasing the goods or services:
- Acted as an agent – the recovery would generally amount to a Disbursement. (Payment that your business makes on behalf of a client but which you later invoice the client for)
- Acted as a principal – the recovery would generally amount to a Reimbursement. Reimbursement is considered to be a part of the consideration for the supply and follows the same VAT treatment as the main supply.
Source: Federal Tax Authority