Implications of VAT implementation on Construction Industry

VAT Accounting

There is some confusion within the construction industry about when VAT should be accounted for, given the number of documents and certificates issued by construction companies. VAT for contracts containing milestones or staged payments will need to be accounted for as soon as payments are received.

When to account for output on supplies:

Time of supply:

  • This is the time at which supply is recognized
  • Ensure VAT is declared in correct tax period

Output VAT:

  • The amount calculated and charged on a taxable person’s sale of goods and services;
  • Time of payment
  • Date of Invoice
  • Receipt of goods/services

Proforma invoices, applications are not covered by the VAT law. Construction firms, are advised to issue VAT invoices as the time at which VAT invoice is issued will determine when VAT is accounted. If a company issues a VAT invoice before it receives payment from customer, VAT will need to be accounted for in the VAT return the time at which the invoice was issued.

Milestone payments

If a company has a service contract with milestone or staged payments, VAT is triggered after each payment is made for each VAT invoice issued. There will be transitional provisions that will take invoices and payments made after January 1, 2018 but which relate to works carried out in 2017 outside the scope of VAT. If milestone is made before and after year 2018, executive regulations will allow contractors to apportion that invoice.

Net Billing

VAT should be accounted for on the net billing of a contract. Moreover, advance payments received in 2017 will be subject to VAT if relating to work after January 1, 2018 and companies should account for the net of their invoices in 2018.
UAE laws stats that contract which are silent on VAT and which straddle January 1,2018, will be treated as inclusive of VAT and VAT will not be added onto the contract price. However, if the customer can recover VAT, then the contract should be exclusive of VAT. Then in that case construction firm can treat the contract as exclusive of VAT and add VAT on top of price.

Advance Payments

It was reiterated that VAT must be accounted on advance payment and companies may have to go back
and ask their customers via VAT invoice to pay. It is still uncertain when companies will need to account for VAT on spread-out advance payments, but any advances after 2018 will be subject to VAT. If a project completes after 2018, but partly executed earlier, retention payment will generally be subject to VAT unless the project was completed before year 2018.

How we can help

  • Optimize tax liability & improve cash flow
  • Provide with transaction specific advice
  • Review long term contracts and propose VAT specific changes
  • Provide VAT implementation plan
  • Support systems and training
  • Act as your tax agents for filing tax returns

Talk to us:

Mr. Sanish Alex: 050 785 7011
Mr. Anish George: 052 920 4505
Ms. Swati Pagarani: 052 905 8337

Reach us: (971) 4 880 2579 | Level 31, Latifa Towers, Sheikh Zayed Road, Dubai, UAE