VAT is relatively straightforward when it comes to invoicing lines that fall under the standard tax calculations. However, an individual responsible for VAT reporting must know VAT treatment on specific activities, goods and services. When all items mentioned in the invoice fall under the taxable definition, the gross invoice total is given 5% at the bottom of the invoice. But when there are exempt lines like salaries, disbursements, and special government services where tax is not applicable, each line has to be separately shown with its unique VAT treatment. As a chartered accountant conducting an audit, one has to be aware of such cases. One you complete the VAT registration you will need to understand simple concepts as this that form a critical part of VAT reporting.
Under the clarification decree mentioned by the FTA VATPO13, a particular case of reimbursements and disbursements are mentioned. Taxable businesses usually find this simple yet critical error in VAT filing. Therefore, it is essential to understand the transactions holistically and post them under the correct VAT account code. This article will help you analyse and differentiate between VAT reimbursement and disbursements.
What is reimbursement?
As per the FTA law, reimbursements are the recovery of expenses that incur a principal cost. To put in simple words, if a service or trade of goods is received from or provided, it is taxable as an out-of-pocket expense or up and above fee, ad hoc expenses and are charged without any mark-up. VAT is applicable on such charges.
Some examples of reimbursements are found in third-party services where one party can charge the other for transport, food, fuel, entertainment charges and charge it as a reimbursement from the company in addition to the principal services provided as a part of the service.
For example, suppose you purchase furniture from a furniture showroom. In that case, you will be charged for furniture fixture charges which you are reimbursing the company as it is a part of their principal service and gets subjected to VAT.
Principals of the UAE VAT Reimbursement
- You must be the direct recipient of the supplier’s products and services.
- The supply contract must be between you (your company) and the supplier without any third party involved.
- The invoice provided by the supplier must have your name or the company name on the invoice, which is the same as in the contract.
- In case of distribution, you must first own the goods in your name, then distribute them or supply them to any other party.
If your company is under the category of all the above principles, then VAT reimbursement can be applied.
What is a disbursement?
According to the FTA, disbursements are a recovery of payments on behalf of another person. It is treated as an out-of-scope VAT expense as it doesn’t form a part of the supply of goods or services.
When a third party pays for certain expenses for your company, they can recover it. However, they cannot charge VAT on the recovery of this amount. For example, if a third party takes care of the issuance of visas for your company, they are responsible for recovering the amount from you; however, they can only recover the exact amount paid for the visa invoice and cannot add additional VAT on their total invoice original invoice while seeking a disbursement. The recovery amount becomes an out-of-scope amount.
Principles of VAT disbursements in UAE
- The other party must be the one receiving the goods on your behalf.
- The other party must make the payment for the invoices for the goods and services from suppliers.
- The invoice or tax invoice provided by the other party should only have the name of your company on the invoice
- There must be a supporting contract between you and the other party, where it is mentioned that they will make payments on behalf of your company.
There are many leading VAT consultants in the UAE. They are an approved Tax Agent of the Federal Tax Authority of the UAE and assist various taxable businesses across the country. Their experienced team of qualified chartered accountants and finance experts also provides remedial measures related to VAT compliance issues and VAT refunds. If you are looking for a VAT consultancy in Dubai or any other emirate of the UAE, contact VAT registration UAE experts.