Expenses are common in business. But not all business expenses are the same. Particular attention must be paid to two types of business expenses – disbursement and reimbursement – and the differences between the two. Knowing the difference between disbursement and reimbursement is important for effective cash management.
In this article, we will discuss disbursements and reimbursements and show you how to tell the two apart with the help of some everyday examples.
The meaning of disbursement is quite simply money paid by a business, usually from a dedicated fund. The payment of interest on a loan or dividends to shareholders are some examples of disbursement. A company also disburses payment to a third party, such as a consultant, for work it hired them to do. A disbursement is not only made by a business but can also be made to a business – for example, the disbursement of a loan by a bank to a company or a government grant to a start-up.
Disbursements are also common outside the world of corporate finance. For example, a college student who qualifies for a government scholarship receives a disbursement in their bank account from the department of education.
The meaning of reimbursement is compensation paid by a business to an employee or another party for out-of-pocket expenses incurred by them in the course of their work. Reimbursements in business are most commonly associated with employee reimbursements. Most companies, as a policy, offer their employees reimbursements for travel (air fare, taxi fare), accommodation (hotel bills), food (restaurant bills), tuition (college courses, training workshops), office supplies, utilities (internet and mobile phone bills), healthcare, and so on.
To sum up the difference between disbursement and reimbursement, a disbursement is simply a payment while a reimbursement is payment that is compensatory in nature. One way to tell the two apart is by checking if the party or individual incurring the expense was acting as an ‘agent’ or a ‘principal’. The clarification can be explained through the following examples, shedding light on the nuanced dynamics of disbursement vs reimbursement:
You hire a lawyer for a specific legal task. In the process of getting the job done, the lawyer pays for court fees and for the services of a private investigator, courier firm, and experts. Once the work is completed, the lawyer sends you an invoice for their legal fee and includes the other expenses they incurred on your behalf as a separate item. The recovery of these expenses by your lawyer is a disbursement because their payment is ultimately your responsibility and not that of your lawyer. Your lawyer was, therefore, acting as an agent when they made the payment on your behalf.
You send your employee to represent your company at an international business conference in a foreign country. She travels to the country, stays there in a hotel, pays taxi fare to get to the conference venue and back, and has all her meals in restaurants. She covers all these expenses with her personal money. On returning to the office, she puts in a request to be reimbursed for her out-of-pocket business expenses. You approve her request and pay her back what the company owes her. This is a reimbursement because the employee spent money on goods and/or services (flight, hotel, food) that she used as a principal. However, because the expenses were incurred on the job, you reimburse her for it.
By now we know that a disbursement is a recovery of expenses by your agent. An agent is one that fulfils the following conditions:
Similarly, in a reimbursement, the expense is incurred by the principal. One is a principal if:
It is very important to know the difference between reimbursement and disbursement from the goods and services tax (GST) point of view as well. Incorrect GST treatment of disbursements and reimbursements is common in Singapore, prompting the Inland Revenue Authority of Singapore (IRAS) to increase its scrutiny of such mistakes. Incorrect tax treatment, whether intentional or unintentional, can lead to stiff penalties and failed audits.
First, a quick recap of GST: it is an indirect tax levied on the supply of goods and services in Singapore (it is called Value Added Tax or VAT in some other countries). It is charged to the end customer, which means GST-registered businesses in Singapore charge GST on the goods and services they provide to their customers and then pay the collected tax to the IRAS. The standard GST rate in Singapore is 7%, revised to 8% with effect from January 1, 2023.
Disbursements are not subject to GST. The agent recovers money they spent on obtaining goods and/or services for you. They don’t own the goods and/or services and just paid for it on your behalf. So, when they seek to recover the expense from you, there is no underlying supply of goods and services to you for GST purposes.
Reimbursements are more complex as they may or may not attract GST. For a reimbursement to be taxable, there must be an underlying supply of goods and/or services to you from the principal. However, reimbursements are not taxable if:
If a reimbursement constitutes a supply and is subject to GST, you can claim input tax on it. Input tax is the GST you pay when you make a purchase from a GST-registered supplier or import goods into Singapore.
Here’s a summary of the key differences between disbursement and reimbursement discussed in this article:
Knowing your disbursements from your reimbursements boils down to effective expense management. Deal with your spend in a smarter way with these useful tools from Aspire: