The businesses have a very common practice of making payments on behalf of their customers and clients to keep the business running and maintain the company's sustainability intact. These transactions have been termed disbursements, and reimbursements and the VAT regime have different treatments for these types of transactions. In this article, we will discuss how VAT impacts the disbursements and reimbursements in the UAE and how Farahat & Co can help you identify these two types of transactions and their VAT treatment to avoid any mistakes and save you from the penalties.
How do disbursements and reimbursements in the UAE define?
The recovery of expenses incurred by a business from other people like their clients or customers can be classified as a disbursement or reimbursement. Based on the nature of the transaction, the VAT treatment varies. Article 1 of the Federal Decree-Law no 8 defines consideration as "all that is received or expected to be received for the supply of goods and services, whether in money or any other acceptable payment forms." Technically the reimbursement term means recovering expenses incurred by a person as a principal. On the other hand, the disbursement term implies the recovery of payments made in the name of another person. The reimbursement payments fall within the scope of VAT. However, disbursements are out of the content of VAT.
A detailed discussion of VAT impact on disbursements and reimbursements in the UAE
The first and foremost factor that classifies a transaction as disbursement or reimbursement is whether the person involved has acted as a principal or an agent purchasing the goods and services. Let's discuss them one by one.
- If the person has acted as an agent, in that case, recovery of those expenses would be a disbursement. Since a disbursement generally does not contribute to a supply, they are not treated as per the VAT rules. For example, a disbursement may be a payment that a business has made on behalf of a client, but this payment will be later invoiced against the client.
- Whereas, when a person has acted as the principal, the recovery of such expenses is subject to VAT. This is because reimbursement is considered a part of the remuneration for the supply, and hence it follows the same VAT treatment as the main supply.
To get a clear picture of the nature of the transaction, one must consult the tax consultants in Dubai to help you make the classification easier for accounting and recording purposes.
Conditions for a transaction to be categorized as disbursement
Certain conditions will help a person determine if the recovery of an expense from another person is satisfied to be classified as a disbursement. These conditions are as follows-
- The other person must be the receiver of the goods and services.
- The other person or party must be liable to pay the supplier.
- The other person or party must have received an invoice or a tax bill, and the invoice must also mention the supplier's business name.
- The other person or party must have given authority to the supplier to pay on their behalf.
- The goods and services must be added to the supplier's supplies to the other person or party.
- The payment must be mentioned on the tax invoice, and the same should be recovered exactly as mentioned on the invoice without any adjustments and mark-ups.
Example: Suppose Company A has made some payment to one of their suppliers in place of their client, and they issue an invoice to their client for the payment. Since the supply was direct from the supplier to the client, the supplier has invoiced the client, and the client made an authorization to Company A for making the payment for their purchase. The expense that Company A recovered from the client company will hence be out of the scope of VAT.
Conditions for a transaction to be categorized as reimbursement
The following conditions define a recovery expense to be a reimbursement expense-
- The company or the person should have been given the contract to supply goods and services in their name and capacity.
- The company should have received the goods and services from the supplier.
- The suppliers must have been issued the invoice in their name, and they are in the legal obligation to pay for the same.
- In cases where the goods are involved, the goods should be owned by the company before making the supply to the other party.
Example: Suppose a marketing services firm enters into a contract with company A for providing Company A with marketing services. Company A incurs costs in its name while these services are being delivered and then recovers these amounts from the marketing services company as per the existing terms of the contract. The expenses that Company A has recovered from the marketing services firm will follow the VAT treatment of the main supply. And hence these payments will come under the normal VAT treatments.
How Farahat & Co. can help with VAT Services in UAE?
There arise situations when it becomes very difficult to analyse the VAT implications on payments and transactions especially when the data has many types of transactions involved with complexity. What the business in the UAE needs in such situations is to get assistance from the VAT experts in the UAE. we at Farahat & Co. have a team of tax consultants in the UAE who are well experienced and have vast knowledge in this field. Our dedicated team provides a plethora of services across all business sectors to provide proper guidance for VAT guidelines in compliance with the ones established by the Federal Tax Authority in the UAE. therefore, get in touch with us today and we shall help you in calculating the impact of VAT on different types of expenses incurred by you.