The construction sector is by far one of the complex areas when it comes to correct VAT On Retention Payments. As it is a project-based business hence most of the times, the billing would be staggered over a period of time which often extends over years. However, the VAT liability has to be accounted for by the contractor according to the Date of Supply Rules as per article 26 of UAE VAT Law (Decree-Law no. 8). The said article states that, in cases where a contract includes periodic payments or consecutive invoices, the date of supply shall be the earliest of the following:
- The date of issuance of any tax invoice;
- The date payment is due as shown on the tax invoice;
- The date of receipt of payment.
However, in the event that 12 months have passed from the date of provision of the goods or services and none of the above events has occurred, a date of supply will be triggered at the 12-month point.
Does the Certification of Construction Project Trigger the Date of Supply?
The certification of a construction project at a particular point in time will not trigger the date of supply for VAT purposes. However, certification of a project is often linked to other obligations such as a due date for payment, which may itself trigger the date of supply.
VAT Treatment of Retention Payments
A retention clause in a construction contract allows the client to hold a certain percentage of the billed amount, once the work has been completed, till the time the Defect Liability Period is over. This means that where the construction services are not considered to be contractually complete, VAT is only due to the extent of any payments received or invoices issued during delivery of the services. Under Article 26, even where the services are contractually complete, there is no tax point until an invoice is issued or payment is received or 12 months have passed – whichever is earlier. The VAT applicable on the retention payment would not be due to be accounted for by the supplier until the time the retention payment is received by the supplier, or an invoice in respect of the retention payment is issued, whichever is earlier.
Note: We at Lynchpin Training and Consulting have trained over 1,500 professionals on UAE/GCC VAT and also have VAT experience in assisting clients with VAT implementation and on-going VAT assistance. Please feel free to contact me at +971-4-4370704 or drop us a line at info@LynchpinConsulting.com and we would be glad to assist you in your VAT Compliance and VAT Return filing.