Understanding UAE VAT Rules of Reimbursement and Disbursement

As a business operating from the UAE (United Arab Emirates), you are likely to encounter situations where some clients require you to make various payments on their behalf. When a client settles this amount, you can classify such repayments as reimbursements or disbursements. But what does this classification mean for the enterprise, and how does it impact your UAE VAT filing?

This blog will help you understand the concepts of reimbursement and disbursement, their differences, their treatment under the UAE law, and how a spend management platform can streamline your VAT compliance process. Keep reading to know more.

Understanding Reimbursement and Disbursement

Reimbursement and disbursement are two common business transactions that have a significant impact on your UAE VAT returns. The VAT treatment of the subsequent recovery of expenses should be done as per public clarification VATP013.

Reimbursement

The term ‘reimbursement’ is used to describe the payment received as repayment of expenses that you had borne as a principal on behalf of a client. It is a repayment made to someone who has spent money on behalf of the company. Under the current UAE VAT regime, reimbursement of such expenses is considered as a supply and is, therefore, subjected to VAT treatment of the main supply. 

Let’s understand this with a real-life example: 

Imagine you run a business in the UAE and incur an expense of AED 500 on behalf of a client, Mr. Ali. When Mr. Ali repays you this amount, it will be considered a reimbursement. As per UAE VAT rules, this reimbursement is to be treated as a supply and is subject to VAT.

So, if the original expense of AED 500 includes a 5% VAT, the actual cost is AED 476.19, and the VAT paid is AED 23.81. When Mr. Ali reimburses you, he’ll pay you AED 500 plus an additional VAT of AED 23.81, making the total AED 523.81.

The public clarification statement VATP013 from the FTA (Federal Tax Authority) specifies the principles to determine if commercial transactions are to be considered as reimbursement of expenses. As per the rules, the conditions are as follows:

• You must have received the goods or services from the supplier.
• The contract for supplying the goods or services must be under your name.
• You must have ownership of the goods before you supply them to your client.
• The tax invoice raised by the supplier should be under your own name. You must be legally required to pay the invoice.

Disbursement

The term ‘disbursement’ describes the recovery of an expense that you have made on behalf of another person. It occurs when you make a payment on behalf of a client, and the client repays you exactly the same amount. In the context of the UAE VAT regime, the disbursement of expenses is not considered a supply and is, therefore, not subject to VAT.

We will consider an example here to understand how reimbursements are treated under UAE VAT rules. You pay a supplier AED 500 on behalf of your client, Mr. Ali. This payment includes a 5% VAT, so the actual cost of the goods or services is AED 476.19, and the VAT paid is AED 23.81.

When Mr. Ali repays you this amount, it is considered a disbursement. As per UAE VAT rules, this disbursement is not treated as a supply and is, therefore, not subject to VAT. So, when Mr. Ali repays you, he only pays the original amount of AED 500. Unlike a reimbursement, there is no additional VAT on disbursements. Therefore, the total amount Mr. Ali pays is AED 500.

According to VATP013, an expense recovery is considered a disbursement if the following conditions are met:

• The recipient of the goods or services should be your client. 
• Your client must be legally required to make payment to the supplier.
• The invoice must have been raised by the supplier in the name of your customer.
• You must have authorization from your client to pay the invoice on his behalf.
• The goods or services for which you have paid should be in addition to the supplies you make to your client.
• You must recover only the exact amount from your client that you have paid to the supplier. There should be no markup. 
• The payment to the supplier should be clearly shown on the invoice you raise to the client.

Impact of Incorrect Expense Identification

Incorrectly identifying an expense as either a reimbursement or disbursement can have significant implications for your VAT returns. If an expense is incorrectly identified as a disbursement when it is a reimbursement, you may underpay VAT, leading to penalties from the FTA. Similarly, if an expense is incorrectly identified as a reimbursement when it is a disbursement, you may overpay VAT, leading to unnecessary costs for your business.

Additionally, incorrectly identifying expenses can lead to non-compliance with UAE VAT law, which can result in penalties and damage the reputation of your business.

Reasons Businesses Need a Spend Management Solution for VAT Compliance 

The evolving regulatory requirements in the UAE have made it crucial for enterprises to leverage a robust spend management solution for VAT compliance. Here are the different reasons that make spend management solutions a must for your business:

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Centralized Visibility

One of the key challenges businesses face is maintaining a comprehensive view of their transactions. This clarity is crucial for applying the correct VAT rates and ensuring precise record-keeping for VAT returns. Spend management solutions like Alaan address this challenge by providing an integrated platform for managing all invoices, purchase orders, and expense reports.

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This single source of information for all expense data enables you to review transactions, identify any issues, and ensure that corrective measures are taken well in time. This enhanced visibility on business spend will streamline your VAT return filing process and help avoid penalties associated with non-compliance.

Automate VAT Calculation

Another significant benefit of spend management systems is their ability to automate VAT calculations.  These systems can apply the correct VAT rate to each purchase and automatically calculate the VAT amount for each invoice.

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This automation ensures compliance with UAE VAT rules and reduces the risks associated with human errors. By eliminating any need for manual processes, you can ensure accuracy in calculations and save valuable resources. 

Generate On-Click VAT Reports

VAT reports are crucial documents that detail all the VAT transactions your company has conducted in a specific period. These reports are crucial for filing VAT returns and for maintaining compliance with tax laws. 

Spend management software automates the process of generating VAT reports. With just a click, your accounting team can generate detailed and accurate reports that include all the necessary details, such as the transaction date, the amount of VAT paid or received, and the VAT rate applied. This level of automation ensures that your company always files precise and timely VAT returns.

Simplify VAT Reclaim and Audits

Spend management systems maintain a complete audit trail of all transactions, including VAT calculations. An audit trail is a secure and orderly record of all financial transactions during specified periods, providing transparency and accountability. This comprehensive record simplifies your processes while responding to tax audits. It helps you provide tax authorities with a clear and detailed view of all VAT transactions, ensuring there is no expense-related fraud. The audit trail also assists in the VAT reclaim process. It provides a clear record of all VAT payments, making it easy to identify eligible expenses and submit accurate VAT reclaims.

In the fast-paced business environment of the UAE, having real-time visibility into business expenses is crucial. Spend management solutions offer this visibility, allowing you to manage your cash flow and prevent unexpected expenditures proactively.

The experts at Alaan fully understand the complexities of VAT compliance in the UAE. The team is committed to helping enterprises streamline their VAT reporting and improve their financial efficiency. 

Connect now to learn more about how our services can help you navigate the nuances of reimbursement and disbursement of UAE VAT effectively.