Introduction
Every business in the UAE deals with payments for many types of services and goods. Sometimes, you may pay for something on behalf of someone else or get paid back for your own expenses. These payments are called disbursements and reimbursements. You must know the right VAT treatment for each kind of transaction. If you handle these the wrong way, you could make mistakes in your VAT returns and risk penalties. Mubarak Al Ketbi (MAK) Auditing helps you stay on track with your VAT and gives you peace of mind.
What’s the Difference Between Disbursement and Reimbursement?
The main difference between a disbursement and a reimbursement is about who acts as the principal and who acts as the agent.
- Disbursement: If you pay as an agent for someone else, and later get paid back, it’s a disbursement.
- Reimbursement: If you pay as the main party and later claim back the money from your customer or client, it’s a reimbursement.
Understanding this difference is the key to following the UAE VAT law.
Why Does It Matter to Differentiate Between Disbursement & Reimbursement?
You must know this difference because each type has a different VAT treatment.
- Disbursement is outside the scope of UAE VAT. You’re just passing along a cost for someone else.
- Reimbursement is inside the scope of UAE VAT. You’re recovering your own expense as part of your business supply, so it gets taxed like a sale.
If you make a mistake here, you may claim the wrong input VAT or miss VAT you should have charged.
Features of a Disbursement Transaction
How can you tell if a payment is a disbursement? Here are the signs:
- The principal is the real recipient of goods or services.
- The principal is the one legally responsible to pay the supplier.
- The supplier’s invoice is made out in the principal’s name.
- The principal gives the agent permission to pay on their behalf.
- The agent’s recovery is exactly equal to the amount paid, with no mark-up.
- The payment is not part of the agent’s own supplies to the principal.
Bullet points to remember:
- Principal receives goods/services
- Invoice is in principal’s name
- Agent pays only with permission
- Agent charges no extra fee
Features of a Reimbursement Transaction
A reimbursement happens when a party pays for expenses itself and later claims back from a client. Look for these features:
- The party pays for goods/services in its own name
- The party is legally responsible for payment
- The supplier issues invoice in that party’s name
- The party owns any goods before transferring them
- The recovery is part of a bigger service or contract
Key points:
- Party receives goods/services
- Invoice is in party’s name
- Party claims expense as part of supply to customer
Why Is Correct Classification So Important?
- It helps you claim the right input VAT.
- It keeps you compliant with UAE law.
- It avoids fines, penalties, and audit problems.
Each transaction must be checked against these features before you submit VAT returns.
How to Classify Your Transactions
When you process payments:
- Ask if you’re the agent or the principal
- Check whose name is on the invoice
- Check who is legally responsible for the payment
- Review if the payment is at cost or includes a profit
Case Example
Suppose Company A pays for hotel rooms for Company B’s employees during a business trip. The hotel invoices Company B. Company A pays the hotel and gets reimbursed by Company B without adding any extra cost. This is a disbursement—no VAT is due.
If Company A books hotel rooms for its own staff and later recharges Company B as part of a service package, that’s a reimbursement—VAT applies.
How Mubarak Al Ketbi (MAK) Auditing Can Help
If you find VAT on expense payments as confusing as a maze, Mubarak Al Ketbi (MAK) Auditing is your guiding light. Our team reviews your business contracts, studies every invoice, and tells you how to record each transaction. We help you keep your VAT records straight and avoid headaches—because at the end of the day, it’s better to be safe than sorry!
For more information
- Visit our office: Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- Contact/WhatsApp: +971 50 276 2132
