Starting a new construction project is always an exciting time.  

It’s when developers seize the opportunity to turn big hopes and dreams into reality.  A reality that could mean creating more products – or a physical representation of the company’s values and ideals.

Now is the time to think big and envision a better future for you and your company.

But with any big project, there are countless ways something could go wrong.  

  • You go over budget.  
  • The finish date is delayed.  
  • You can’t get the right materials.  
  • One of the partners backs out.  

And now, VAT-related accounting for materials and expenses adds another potential conflict.

That could mean the difference between a profitable project or suffering a big loss.

So, how does VAT specifically influence the UAE’s construction industry?  And is VAT making it harder for one of the fastest growing construction industries in the world, or is it no big deal?

VAT on Constructing New Buildings

First, we’ll quickly get to the bottom line of VAT-related costs of construction.

As a developer and property owner, you are paying 5% VAT on both supply of goods and real estate services when building a property, regardless of what kind.

However, VAT is recoverable when building a property.

What about down payments?  

VAT is applicable when the down payment is paid.  Don’t be surprised if your developer requests VAT on the down payment even if the project hasn’t begun.  

Why?

Regulations stipulate VAT is applicable whenever any of the following happens first:

  • The date an invoice or PPC (project payment certificate) is raised
  • The date work is completed
  • Payment date: that is, when the contractor receives the full payment of the invoice (PPC) issued, excluding retentions and penalties.

As you can see, VAT payment time is not tied to the project’s chronology of steps.  

For example:

Let’s  you commissioned a building construction for AED 20 million+ 5% VAT.  

The contract mandates 20% down payment before the project begins.

That means you’re paying AED 2 million + 5% (AED 100,000) for a total of AED 2.1 million just to start.

VAT & Retention Payments

If you’ve handled construction accounting before, you know a thing or two about retention policies.

As you’re aware, the developer usually protects his investment by withholding the retention payment (usually 10%) for about a year to ensure construction milestones are accomplished.

So where does VAT fit into this deal?

As a developer, apply VAT before actually paying the retention.  

Why?  

Because you’ll have to pay VAT as soon as retention work is finished and invoiced.  

And if the retention work is incomplete or pending certification?  

Just pay VAT along with the retention when you receive the completion certificate

Conclusion

Did we cover everything related to VAT’s effects on the construction industry?  Do you still have questions? If so, feel free to shoot us an email at Dhariba.com for all your tax questions and needs.  Or just leave us a comment below.