UAE VAT Reimbursement & Disbursement: Process, Eligibility, and Treatment

VAT on reimbursement of expenses UAE, and VAT on disbursement are two terms that sound deceptively similar, yet mean entirely different things. It’s no surprise that businesses often confuse the two, especially when the treatment varies depending on the nature of the business activity.

Reimbursement refers to the recovery of VAT paid on eligible business expenses. In contrast, disbursement refers to the costs paid on behalf of someone else, where VAT is not your liability to recover. 

This blog would break down the meaning of each term, explain how to correctly classify transactions, and outline the necessary steps for handling them in compliance with UAE VAT laws.

What is VAT Reimbursement in the UAE?

VAT reimbursement refers to situations where a business recovers expenses it has borne on its own account and then charges the client for those expenses as part of its supply. Since the business is the one legally responsible for the expense, reimbursement is treated as a supply and is therefore subject to VAT.

Example:

You run a consulting firm. You book airline tickets and hotel stays to travel to a client’s office for a project.

• The bookings are in your name.
• You pay the vendor directly and receive invoices under your company’s name.
• You later raise an invoice to the client and include those travel costs.

Since you are the one who legally received the service and paid for it, the reimbursement forms part of your taxable supply. VAT should be applied when you invoice the client.

What is VAT Disbursement?

VAT disbursement occurs when a business pays a third-party expense on behalf of the client and then recovers the exact amount, with no markup or VAT added, from the client. In this case, the business acts merely as a payment agent, not the principal. The original invoice must be in the client’s name, and the client must be legally liable for the payment of the service.

Example:

You are a law firm representing a client in court. You pay a government fee (e.g., for a license or official document) on behalf of your client.

• The fee invoice is addressed to your client.
• You are only facilitating the payment.
• You recover the exact same amount from the client without charging VAT.

Since this is a disbursement, it is not considered a supply for VAT purposes, and no VAT is applied when you recover the cost.

Difference Between Reimbursement and Disbursement

We have summarised the difference between the two in the table below:

Who is Eligible for VAT Reimbursement in the UAE?

Businesses registered for VAT in the UAE are eligible to claim VAT reimbursement when:

• They have incurred expenses as a principal, meaning they purchased the goods or services on their own.
• The tax invoice is issued in their name
• They are legally liable to pay the supplier.
• The expenses should be directly related to their taxable business activities.
• They pass on the cost to the client as part of their supply, often with a markup or profit.
• Foreign businesses may also be eligible for a VAT refund scheme in specific cases, like if UAE VAT expenses were incurred during exhibitions or business travel. It is provided when certain conditions are met under the FTA's refund process for non-residents.

Who is Eligible for VAT Disbursement in the UAE?

Any business, whether they are VAT registered or not can engage in disbursement of expenses provided strict conditions are met as outlined by the FTA, if there is any foreign or non-resident related transactions occur. Disbursement is not a VAT recovery mechanism, but a pass-through of costs where:

• The client is the recipient of the goods or services.
• The supplier’s invoice is issued in the client’s name.
• The business has the authorisation to pay on behalf of the client.
• The exact amount paid is recovered, with no markup or VAT added.

Step-by-Step Process for UAE VAT Reimbursement

The steps to treat VAT for reimbursement transaction are:

1. Start with ensuring that your business is registered with the UAE Federal Tax Authority (FTA) and has a valid TRN.
2. Confirm that the expense qualifies as a reimbursement (refer to the eligibility criteria talked above for detailed understanding), i.e., incurred by your business as a principal and directly related to taxable activities.
3. Make sure all supplier invoices are:

• Addressed to your business
• VAT-compliant
• Matched to the goods/services received

4. Properly log the expense in your books with clear linkage to the main supply you are making to the client.
5. When invoicing the client, include the reimbursed amount as part of your taxable supply and charge VAT accordingly.
6. Report in VAT Return section of the EmaraTax Portal

• Input VAT: Claim on eligible supplier invoices.
• Output VAT: Declare VAT collected on the reimbursement in your VAT return.

Make sure that you file your VAT return within the due date.

Required Documents for VAT Reimbursement

To ensure compliance and support your VAT position during audits or inquiries, maintain the following documents:

1. VAT-compliant supplier invoices, and these must be in your name and include TRN
2. Proof of payment. This could be anything from bank transfer records or receipts against goods sold.
3. Client invoice showing the reimbursed expense as part of the main supply
4. Contracts or agreements to show that the expense was incurred for the main service
5. VAT return reports showing input and output VAT treatment
6. Supporting correspondence or emails if necessary to establish the principal-agent relationship

Conclusion

It must be clear by now how vastly different reimbursement and disbursement are as treatment for VAT. Misunderstanding the distinction can lead to compliance errors, misreporting, potential penalties, legal trouble, etc. 

So, to reiterate, reimbursement is applicable when your business incurs an expense as the principal, receives the supply in its own name, and then charges the client for it. In this case, the recovery is treated as part of your taxable supply and must be subject to VAT. Disbursement, on the other hand, applies when you merely pay an expense on behalf of your client, where the client is the actual recipient and is legally liable. If all conditions are met, this recovery is not considered a supply and is outside the scope of VAT.