Disbursements & Reimbursements

3 disbursments

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.