What do Reimbursement and Disbursement Mean?
Reimbursement and disbursement are two financial terms often used in business transactions. They have different VAT treatments in the UAE.
When dealing with business expenses, it’s important to differentiate between reimbursement and disbursement, as they have different accounting and tax implications.
Reimbursement Explained
A reimbursement occurs when a company initially incurs an expense but later recovers the cost from another party. In this case, the company temporarily bears the expense, but it is ultimately paid by the responsible party.
Example of Reimbursement
Consider a scenario where a company books a flight ticket for an employee to attend a business conference. Initially, the company pays for the ticket, but later, the employee is required to repay the company for the ticket cost. In this situation, the company is simply recovering an expense it initially covered, making it a reimbursement.
From a taxation perspective, reimbursements are typically considered part of the main supply and may be subject to Value Added Tax (VAT) or other applicable tax regulations.
Disbursement Explained
A disbursement occurs when an entity pays a cost on behalf of a client or another party without adding a markup. The company acts as a middleman, and the actual expense is not treated as part of the company’s revenue.
Example of Disbursement
A law firm handling a client’s legal matter may need to pay government filing fees on behalf of the client. The law firm makes the payment directly to the government agency but later charges the exact amount to the client. The law firm is merely passing through the cost, meaning it does not treat the amount as part of its income.
From a tax perspective, true disbursements are typically exempt from VAT because they are not considered a part of the main supply.
Key Differences and VAT Implications
Understanding whether a payment is a reimbursement or disbursement is critical for VAT compliance:
- Reimbursement is generally treated as part of the company’s taxable supply and may be subject to VAT.
- Disbursement is treated as an expense incurred on behalf of another party and is usually not subject to VAT.
The Federal Tax Authority (FTA) and similar regulatory bodies often issue clarification statements to help businesses navigate VAT treatments for these expenses. Proper classification ensures correct accounting and tax reporting, preventing compliance issues.
Related: How to Calculate VAT in UAE?
How to Assess Reimbursements vs. Disbursements per UAE VAT?
In the UAE, businesses must carefully assess whether a payment qualifies as a reimbursement or a disbursement to determine the correct VAT treatment. The classification depends on three key factors:
1. Ownership of Goods or Services
- If your business purchases goods or services for its own use and later recovers the cost from another party, it is considered a reimbursement.
- If you pay an expense on behalf of a client and do not claim ownership of the goods or services, it is treated as a disbursement.
Example:
✅ Reimbursement: A company books hotel accommodation for an employee attending a business event. The company initially pays, but later deducts the amount from the employee’s salary. The company took ownership of the service and recovered the cost, making it a reimbursement.
✅ Disbursement: A law firm pays a government licensing fee for a client’s legal registration. The firm does not take ownership of the service—it simply acts as an agent paying on behalf of the client. This makes it a disbursement.
2. Control Over the Cost
- If your business has control over the transaction, decides the price, and then recovers the amount from another party, it qualifies as a reimbursement.
- If your business has no control and simply passes on an exact amount without markup, it is a disbursement.
Example:
✅ Reimbursement: A consulting firm arranges travel for its auditors and later bills the client for the travel costs. Since the consulting firm controlled the travel booking process and incurred the cost as part of its service, it qualifies as a reimbursement.
✅ Disbursement: A real estate agency collects government registration fees from a client and directly pays them to the land department without markup. The agency is not controlling the cost; it is merely facilitating the payment, making it a disbursement.
3. VAT Treatment in the UAE
- Reimbursements are considered part of a company’s taxable supply and are subject to 5% VAT.
- Disbursements are typically outside the scope of VAT, as they are payments made on behalf of a client with no profit margin.
Example:
✅ Reimbursement: A company purchases office supplies and later bills a client for these expenses. Since the company is reselling or recovering the cost of goods under its name, VAT applies.
✅ Disbursement: A freight forwarding company pays a customs duty on behalf of a customer and later collects the exact amount. Since the duty is a government-imposed fee and the freight company is not profiting from it, it is not subject to VAT.
Why Correct Classification Matters?
Proper classification of reimbursements vs. disbursements is essential for:
✔ Accurate VAT reporting – Misclassifying disbursements as reimbursements can lead to unnecessary VAT payments.
✔ Regulatory compliance – The UAE’s Federal Tax Authority (FTA) requires businesses to correctly apply VAT on expenses.
✔ Avoiding penalties – Incorrect VAT filings can result in financial penalties from the FTA.
By carefully analyzing ownership, control, and VAT treatment, businesses can ensure correct accounting and compliance with UAE VAT laws.
Treatment of Reimbursement and Disbursement Expenses
What Are Reimbursable Expenses?
Reimbursable expenses are those incurred by a business and later recovered from another party. These expenses are considered part of the main supply and are subject to VAT. Examples include:
- Business travel expenses
- Advertising costs incurred on behalf of a client
- Equipment rental fees charged to another entity
What Are Disbursable Expenses?
Disbursable expenses are costs paid on behalf of a client, where the company acts as an intermediary. These are outside the scope of VAT. Examples include:
- Government fees paid on behalf of a client
- Legal fines paid by a law firm for a client
- Customs duties paid on behalf of an importer
How to Comply with UAE VAT Laws for Disbursements?
To ensure compliance with UAE VAT laws:
- Identify and Document Expenses: Keep all invoices, receipts, and relevant records.
- Determine VAT Treatment: Classify the expense as standard-rated, zero-rated, exempt, or out of scope.
- Review Contracts: Ensure that agreements clearly define VAT implications for reimbursements and disbursements.
- Consult Tax Experts: Get professional advice from top audit and accounting companies in UAE to determine correct VAT treatment for cost recharges.
Reimbursements and Disbursements – FAQs
Why is it important to understand the difference between reimbursements and disbursements in VAT reporting?
Understanding the difference is crucial because reimbursements are subject to VAT, while disbursements may be outside the scope. Incorrect classification can lead to penalties or incorrect VAT filings.
How does the ownership of goods impact the principles of reimbursement?
Ownership determines VAT treatment. If the supplier invoices you directly and you later recover the cost, it is a reimbursement. If you are simply paying on behalf of another entity, it is a disbursement.
Can a reimbursable expense ever be exempt from VAT in the UAE?
Yes, if the reimbursed expense falls under VAT-exempt categories, such as:
- Certain financial services
- Residential property leases
- Local passenger transport
What steps should businesses take to comply with UAE VAT laws for disbursements?
To comply with VAT laws:
- Document expenses accurately.
- Classify the VAT treatment correctly.
- Ensure contracts address VAT implications.
- Seek professional tax guidance.
Are there specific industries where disbursement is more common than reimbursement?
Yes, industries such as consulting, legal services, and marketing agencies deal with more disbursements than reimbursements. These businesses often pay expenses on behalf of clients and pass them on without adding VAT.
Understanding VAT treatment of reimbursements and disbursements ensures businesses comply with UAE tax regulations and avoid penalties.