Understanding VAT Reimbursement and Disbursement in the UAE

VAT on services and expenses in the UAE is not always borne by the same party that first receives an invoice. Agents, group companies and project managers often pay costs on behalf of someone else, then recover the amount later. 

At that point, finance teams must decide if the later payment is a VAT reimbursement or a VAT disbursement. Getting this line wrong can distort VAT returns, understate input tax or create exposure during an FTA review.

Let’s know in depth how VAT Reimbursement and Disbursement work in the UAE in this detailed guide.

What Is VAT Reimbursement In The UAE?

A reimbursement arises when one party pays a cost in its own name, and then passes that cost on to another person as part of its own supply.

Key traits of a reimbursement:

• The invoice from the supplier is addressed to the agent or intermediary.
• The intermediary has the legal obligation to pay the supplier.
• The later recharge is part of the price of a wider supply, such as a management fee or project charge.
• VAT on the original invoice belongs in the intermediary’s VAT return.

Typical examples:

• A consulting firm books hotel and travel costs when delivering work for a client. The hotel invoices the firm. When the firm invoices the client, those costs are added as reimbursable expenses.
• A logistics company pays storage charges in its own name before shipping goods. The final invoice to the customer includes those charges on top of the transport fee.

In both cases, the intermediary is the one making a taxable supply. VAT input on the original invoices should stay in that entity’s records, with output VAT charged on the final invoice to the customer.

What Is VAT Disbursement In The UAE?

A disbursement is different. In a disbursement, the intermediary only passes on a cost that legally belongs to the final customer.

Key traits of a disbursement::

• The original supplier’s invoice is addressed to the final customer, not to the intermediary.
• The intermediary pays the bill only as a collecting and paying agent.
• The later recovery of funds is not considered for a supply by the intermediary.
• No additional VAT is charged on the recovery; the VAT position remains between the supplier and the final customer.

Typical examples:

• Government fees paid by a law firm or corporate services provider on behalf of a client, where the receipt is in the client’s name.
• Official translation or attestation fees where the government or authority documents list the client as the party liable.

In such cases, the intermediary records a receivable from the client but does not claim input VAT on the underlying fee and does not charge output VAT on the recovery. The VAT stays only in the client’s VAT return.

Key Tests to Separate VAT Reimbursement and Disbursement

Because real life contracts are messy, the FTA and international practice use certain tests to decide the correct treatment. Finance teams can work through the following questions.

1. Who is the actual customer of the underlying supply?

The name on the contract and invoice is the starting point. If the intermediary contracts in its own name, reimbursement is more likely.

2. Who controls the supplier relationship and bears risk?

If the intermediary chooses the supplier, negotiates terms and carries risk of non-performance, the cost usually becomes part of its own supply.

3. Is there any mark-up or commercial margin?

Adding a margin almost always signals reimbursement. Disbursements are normally passed through at exact cost.

4. How does the contract describe fees and expenses?

Separate “professional fees plus reimbursable expenses” language often points to reimbursement. A narrow “agent only” role with clearly defined disbursement points the other way.

Arnifi helps review standard contracts and expense flows against these tests so that internal policies line up with FTA expectations.

Accounting Treatment for Reimbursements

For reimbursements, accounting entries usually look like this (simplified):

• When the intermediary receives the supplier invoice:
  • Debit expense (or cost of sales).
  • Debit input VAT.
  • Credit accounts payable.
    
• When invoicing the customer:
  • Debit accounts receivable.
  • Credit revenue or fee income (which may include reimbursed costs).
  • Credit output VAT on the total taxable amount.

The key point is that the reimbursed amount forms part of the taxable base. VAT is calculated on the full amount that the customer pays for the service, including reimbursable expenses. 

A good practice includes separate GL codes for reimbursable expenses and clear mapping in the VAT return so that input and output amounts reconcile.

Accounting Treatment For Disbursements

For genuine disbursements, the pattern is very different:

• When the intermediary pays the supplier on behalf of the client:
  • Debit receivable from client (disbursements)
  • Credit bank
    
• The intermediary does not recognise input VAT on the invoice.
  
• When recovering the amount from the client:
  • Debit bank
  • Credit receivable from the client

No output VAT is recorded on the recovery. The client, whose name is on the underlying invoice, records the VAT in its own input tax claim subject to the normal rules.

How Arnifi Supports UAE Businesses With Correct VAT Reimbursement and Disbursement

Because VAT interacts with contracts, legal status and group structures, many companies prefer a specialist partner to map these flows. Arnifi often helps finance and legal teams:

• Classify existing expense flows as reimbursement or disbursement,
• Revise engagement letters, SLAs and agency agreements,
• Align GL coding and VAT return mapping, and
• Prepare working papers that demonstrate the reasoning during any FTA query.

For groups planning new shared-service centres or agency models, early involvement avoids costly structural changes later. Arnifi’s tax and accounting specialists combine technical reading of UAE VAT law with practical experience of how banks, free zones and government entities process fees in real cases.

Final Thoughts

VAT reimbursement and disbursement in the UAE stay at the border between tax and commercial reality. The correct answer depends on contracts, invoices and actual behaviour, not just how a recharge line is labelled in an invoice. 

Clear policies, disciplined documentation and regular reviews keep this border tidy. With Arnifi coordinating tax, legal and accounting views, boards gain comfort that pass-through costs are booked correctly and that VAT positions withstand close scrutiny over time.

FAQs on VAT Reimbursement and Disbursement in the UAE

1. Why does the FTA focus so much on reimbursement vs disbursement?

The distinction affects which party is making a taxable supply and who can claim input VAT. Wrong classification can lead to under-declared output tax, overstated input claims and penalties during an FTA audit.

2. Can a single invoice contain both reimbursements and disbursements?

Yes. For example, an advisory fee plus properly documented government charges may appear on one invoice. The fee portion attracts VAT as consideration for services, while qualifying disbursements may be shown separately and kept outside the taxable base.

3. Are all pass-through government fees treated as disbursements?

Not always. If a service provider is the legal customer on the government invoice or bundles the fees into a single charge, the FTA may treat the amount as part of the provider’s own supply, turning it into a reimbursement.

4. How should contracts describe disbursements to support VAT treatment?

Contracts generally need clear language that the intermediary acts as agent for specific costs, that legal liability for those costs rests with the client and that amounts will be recovered at exact cost, without mark-up.

5. What records help defend disbursement treatment during audit?

Useful evidence includes contracts showing agency status, supplier invoices in the client’s name, proof of payment, and internal policies explaining why those costs are treated as disbursements. Together, those items show that VAT sits with the correct party.