VATP013 discusses transactions where a person incurs expenses and then recovers these expenses from another party, and sets out the criteria for determining if the recovery is a ‘disbursement’ (out of scope of VAT) or ‘reimbursement’ (within scope of VAT). These are differentiated as follows.
| Disbursement | Reimbursement |
| Recovery of payments made on behalf of another person. | The term “reimbursement” refers to the recovery of expenses that you incur as a principal |
| Out of scope of VAT, | within the scope of VAT |
| a disbursement is a payment that your business makes on behalf of a client but which you later invoice the client for. | where you have acted as a principal, the recovery would generally amount to a reimbursement. |
| The other party should be the recipient of the goods or services | You should have contracted for the supply of goods or services in your own name and capacity; |
| The other party should be responsible for making the payment to the supplier; | You should have received the goods or services from the supplier; |
| The other party should have received an invoice or tax invoice, as the case may be, in its own name from the supplier; | The supplier should have issued the invoice in your name and you are under the legal obligation to make payment for it; |
| The other party should have authorized you to make the payment on his behalf; | In case of goods, you should own the goods prior to making the onward supply to the other party |
| The goods or services paid for should clearly be additional to the supplies you make to the other party; | |
| The payment should separately be shown on the invoice and you should recover the exact amount paid from the supplier, without a mark-up. | |
| For example, Company A procured group medical insurance from a local insurance company and received an invoice directly from the insurance company. Company A Requested Company B to make the payment on its behalf. The subsequent recovery of the amount by Company B from Company A will amount to a disbursement, and would not be subject to VAT | For example, Company A entered into a contract with Company B to provide marketing services. The contract stipulated that Company A would be eligible to reimburse the expenses from Company B. Company A incurred the expenses in its own name and subsequently recovered the amounts from Company B as per the terms of the contract. The recovery of expenses from Company B would follow the same VAT treatment as that of the main supply. |