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September 8, 2026Disbursement vs Reimbursement in UAE VAT
Key Takeaways
- When you recover an expense from a client, the VAT treatment depends on whether you paid as their agent or as the principal.
- Disbursement — you paid on behalf of the client, the invoice was in their name, and you're just passing the exact cost back to them. This is outside the scope of VAT, so you don't charge VAT when you recover it.
- Reimbursement — you paid in your own name as part of delivering your service, and you're recovering that cost as part of what you charge the client. This is treated as part of your supply and follows the same VAT treatment as your main service.
Almost every business ends up paying for something on a client's behalf at some point (courier fees, government charges, travel costs, insurance premiums, subcontractor invoices). The natural instinct is to think, "I'm just passing this cost along, so there's no VAT angle to worry about." That instinct is often wrong.
The UAE VAT Law defines consideration very broadly. It covers anything you receive, or expect to receive, in exchange for a supply of goods or services. That means a cost recovery isn't automatically ignored for VAT purposes. Whether VAT applies comes down to one question: were you acting as the client's agent, or were you acting in your own right as the principal?
Disbursement: Recovering a Cost on Someone Else's Behalf
A disbursement happens when you step in and pay a supplier on your client's behalf, then simply recover that exact amount from them afterwards. You're not the one buying the goods or service — your client is. You're just the middleman making the payment.
Because you never really consumed or supplied anything here, a disbursement isn't treated as a supply at all. It sits outside the scope of VAT, so there's no VAT to charge when you claim it back from your client.
Example: Your company arranges group medical insurance for its staff. The insurer issues the invoice directly to your company. You ask a related company to pay that invoice on your behalf. When that related company later recovers the exact amount from you, it's a straightforward disbursement . No VAT applies to that recovery, because the invoice was never in the paying company's name to begin with.
The Five Conditions for a Disbursement
The FTA will only accept a cost recovery as a genuine disbursement if all of the following are true:
- Your client is the actual recipient of the goods or services, not you.
- Your client is responsible for paying the supplier, even though you're the one physically making the payment.
- The invoice from the supplier is issued in your client's name, not yours.
- Your client has authorised you to make the payment on their behalf.
- You recover the exact amount paid — no mark-up, no margin, no rounding in your favour . The amount is shown separately on your invoice to the client, clearly distinct from your own fees.
Miss even one of these, and the FTA is likely to treat the recovery as a reimbursement instead.
Reimbursement: Recovering a Cost You Incurred as Part of Your Own Service
A reimbursement is different. Here, you contracted for the goods or services in your own name, you're legally on the hook to pay the supplier, and the cost is really your cost of doing business, even though you pass it on to the client. Because the expense forms part of the overall service you're providing, the recovery is treated as part of your consideration and follows the same VAT treatment as your main supply.
In practice, this means if your main service is standard-rated at 5%, the recovered cost is standard-rated too. If your main service happens to be exempt or zero-rated, the recovered cost follows that treatment instead.
Example: A marketing agency signs a contract to run a campaign for a client, with the agreement stating the agency will recover certain campaign expenses from the client. The agency pays those expenses in its own name. The supplier invoices go to the agency, not the client. When the agency later bills the client for those costs, it's a reimbursement, and VAT applies in line with the marketing service itself.
The Four Conditions for a Reimbursement
A cost recovery is treated as a reimbursement when:
- You contracted for the goods or services in your own name and capacity, not as someone's agent.
- You received the goods or services yourself from the supplier.
- The supplier's invoice is issued in your name, and you're legally obligated to pay it.
- For goods specifically, you owned them before passing them on to the client.
Disbursement vs Reimbursement
| Disbursement | Reimbursement | |
|---|---|---|
| Who's the real buyer? | Your client | You |
| Invoice issued to | Your client's name | Your name |
| Legal obligation to pay | Sits with your client | Sits with you |
| Authorisation needed | Yes — client must authorise you to pay | Not applicable |
| Mark-up allowed? | No — exact cost only | Yes, if it's built into your fee |
| VAT treatment | Outside the scope of VAT | Follows the VAT treatment of your main supply |
| Shown on invoice | Separately, as a pass-through cost | As part of your overall charge |
The five (or four) conditions above are strong indicators, but the FTA is clear that they're meant to guide your analysis, not replace it. You need to look at the full facts and circumstances of each arrangement (the contract terms, who's genuinely on the hook to the supplier, and the commercial substance of the deal) to reach the right conclusion. A single contract can even include a mix of both: some costs recovered as disbursements, others as reimbursements, depending on how each one was actually incurred.
If you're not sure how a particular cost recovery should be classified, it's worth getting it reviewed before you invoice. Reclassifying VAT after the fact is far more painful than getting it right the first time.
Why Getting this Right Matters for Input Tax Too
There's a knock-on effect for input tax recovery. If a cost qualifies as a genuine disbursement, the underlying tax invoice is in your client's name. This means your client, not you, is generally the one entitled to recover any input tax on it (subject to the normal input tax rules).
If you're the one incurring the cost as principal under a reimbursement arrangement, the invoice is in your name, and you recover the input tax through your own VAT return, again subject to the standard input tax recovery rules.
This is another reason the agent-versus-principal question matters. It doesn't just affect output VAT, but it also determines who's entitled to claim the input tax in the first place.
Frequently Asked Questions
This guide is for general informational purposes and reflects UAE VAT rules as currently in force. It doesn't constitute tax advice. For guidance on your specific arrangements, please contact our team.
