VATP013

Issue

Article 1 of the Federal Decree-Law No. 8 of 2017 on Value Added Tax ("VAT Law") defines consideration as "all that is received or expected to be received for the supply of goods or services, whether in money or other acceptable forms of payment".

In commercial transactions, a person may incur expenses and subsequently recover such expenses from another party. The VAT treatment of the subsequent recovery of expenses depends on whether the recovery is tantamount to a "disbursement" or "reimbursement".

This Public Clarification discusses the VAT principles for differentiating between a disbursement and a reimbursement, and the VAT treatment that should be applied to a disbursement and reimbursement of expenses.

Summary

The term "reimbursement" refers to the recovery of expenses that you incur as a principal. The term disbursement, on the other hand, refers to the recovery of payments made on behalf of another person.

While a disbursement of expenses is out of scope of VAT, reimbursement of expenses falls within the scope of VAT.

Detailed discussion

The first step to determine whether a recovery is a disbursement or reimbursement is to establish whether you have acted as a principal or an agent in purchasing the goods or services.

Where you have acted as an agent, the recovery would generally amount to a disbursement. A disbursement does not constitute a supply and is, therefore, not subject to VAT. For example, a disbursement is a payment that your business makes on behalf of a client but which you later invoice the client for.

On the other hand, where you have acted as a principal, the recovery would generally amount to a reimbursement. A reimbursement is considered to be a part of consideration for the supply and follows the same VAT treatment as the main supply.

Principles for Disbursement:

The following principles will help you determine whether the recovery of an expense from another party satisfies the conditions for being classified as a disbursement: