Going back to the Fundamentals of UAE VAT

The UAE VAT Law is evolving day by day.  But we still stumble upon some fundamental concepts of the UAE VAT Law.   In this week’s tax insights, we discuss the expenses subject to reimbursement and disbursement.

Reimbursement vs Disbursement

VAT rules are complex and can be confusing, especially when it comes to understanding the concepts such as reimbursement and disbursement, and the difference between them. It is crucial to understand these concepts to avoid any mistakes in VAT returns and consequently, fines. 

When more than two independent parties are involved in a service or a supply transaction with associated payments, these payments may be subject to VAT under the principles of reimbursement or disbursement.  When reimbursement is the case, there are two levels of VAT involved, whereas, under the disbursement principle, VAT is payable only once.

Reimbursement refers to the recovery of expenses incurred as principal, while the Disbursement refers to the recovery of expenses as an agent.

The following principles apply when an expense recovery is a reimbursement:

1. The middleman has the contract with the supplier and not the service recipient.
2. The middleman receives the goods or services from the supplier.
3. The supplier issues an invoice in the middlemen's name, making the person responsible for payment.
4. In the case of goods supply, the middlemen must also own the goods before subsequently supplying them to the customer.

Since the middleman receives the goods and services and assumes the payment responsibility, the person effectively is acting in the capacity of a principal.  Consequently, this becomes part of the consideration for the supply and follows the VAT treatment of the main supply.  This results in a VAT levy at each stage of the supply.For example, Head office recharges.

Conversely, disbursement involves making a payment on behalf of someone else (like an agent). Here, the customer is the recipient of the goods or services and has the payment responsibility.  The invoice must be in the customer’s name and not in the agent’s name.  The tax invoice is addressed to the customer, and the customer's authorized agent makes the payment on the customer's behalf.

In the disbursement situation, the payment made by the agent does not constitute consideration. Therefore, the transaction at the level of the agent falls outside the scope of VAT.  The accounting and tax records must reflect the above treatment in the expenses and payments made on behalf of others.  For example, Correspondent Bank Charges.

Understanding the VAT rules in the UAE is crucial to run a successful business.  Reimbursement and disbursement are not the same in the eyes of the law, and it's important to differentiate between the two to avoid any penalties. Remember, VAT is payable on the reimbursement of expenses, but not on disbursements. Consulting tax advisors is a wise step to ensure compliance with VAT rules. Stay informed and stay ahead of the game!