In the UAE, it is common for businesses to make payments on behalf of clients or customers to ensure smooth operations and maintain business continuity. These transactions are typically categorized as disbursements or reimbursements. Under the VAT framework, each type of transaction is treated differently, and businesses must clearly understand the distinction to remain compliant and avoid penalties.
This article explains how VAT applies to disbursements and reimbursements in the UAE, along with how Savant Accounting & Tax can help businesses manage these transactions effectively.
What Are Disbursements and Reimbursements?
When a business recovers expenses paid on behalf of another party, the transaction may be classified as either a disbursement or a reimbursement, depending on the role of the business:
- Reimbursement – Expenses incurred by a business in its own name as the principal supplier. These are within the scope of VAT.
- Disbursement – Payments made on behalf of a client where the client is the actual recipient of the supply. These are out of scope for VAT.
The UAE VAT Law (Federal Decree-Law No. 8) defines “consideration” as any payment received or expected in exchange for the supply of goods or services. Therefore, correctly identifying whether a payment is a disbursement or reimbursement is critical for applying the right VAT treatment.
VAT Treatment of Disbursements and Reimbursements
The classification depends on whether the business acts as a principal or an agent:
- Disbursements (Agent Role):
When a company pays on behalf of its client (as an agent), the recovery of that payment is considered a disbursement. Since this transaction does not constitute a supply, it is not subject to VAT.
Example: Company A pays a supplier directly on behalf of a client, with the supplier invoicing the client. The amount Company A recovers from its client is outside the scope of VAT. - Reimbursements (Principal Role):
When a business incurs costs in its own name while providing goods or services, and later recovers those costs, it is considered a reimbursement. This is treated as part of the main supply and is therefore subject to VAT.
Example: A marketing agency provides services to Company B, incurring advertising costs in its own name. When the agency recovers these costs from Company B, they follow the VAT treatment of the main service provided.
Conditions for Disbursement Classification
To be treated as a disbursement (and excluded from VAT), the following must apply:
- The client must be the actual recipient of the goods or services.
- The client must be legally liable to pay the supplier.
- The supplier’s invoice must be issued directly to the client.
- The business must have authorization to make payment on the client’s behalf.
- The amount recovered must match the supplier’s invoice exactly, with no mark-up.
Conditions for Reimbursement Classification
For a recovery of costs to qualify as a reimbursement (and fall under VAT rules), these conditions must apply:
- The business contracted to supply goods or services in its own name.
- The business received the goods or services from the supplier.
- The invoice was issued in the business’s name, making it legally liable to pay.
- In the case of goods, ownership transferred to the business before supply to the client.
Why Getting It Right Matters
Incorrectly classifying a transaction as a disbursement instead of a reimbursement (or vice versa) can lead to compliance issues, penalties, or VAT miscalculations. This is particularly challenging when handling a large volume of transactions involving different types of expenses.
That’s why businesses in the UAE should seek professional guidance to ensure proper VAT treatment.
How Savant Accounting & Tax Can Help
At Savant Accounting & Tax, our experienced VAT consultants assist businesses across the UAE in:
- Correctly classifying transactions as disbursements or reimbursements
- Ensuring compliance with Federal Tax Authority (FTA) requirements
- Preparing accurate tax invoices and VAT records
- Minimizing risks of penalties through proper documentation and reporting
If you are unsure about the VAT implications of your transactions, contact Savant Accounting & Tax today. Our team will provide tailored advice to help you stay compliant and manage your VAT obligations with
FTA guide: https://tax.gov.ae/DataFolder/Files/Pdf/VATP013%20-%20Disbursements%20and%20Reimbursements.pdf