The UAE Federal Tax Authority (“FTA”) issued a Real Estate Guidance document (VAT GRE1) that addressed many aspects of the real estate industry practices including construction services.
The purpose of the VAT GRE1 is to explain how the FTA will apply VAT on certain matters where the VAT legislation may have not been clear. In this respect, three important matters were explained by the FTA.
Progress Payment Certificate (PPC):
PPCs are usually certificates issued by the engineer which determines the amounts due to the contractor for the works completed for a certain period of time during the life time of the project. The contractor would usually submit claim to the engineer specifying the value of the work completed, purchased materials and the ratio of the retention the contractor is entitled to. The engineer would review the claim and issue the certificate either approving the claim of the contractor totally or partially or denying it altogether. The issuance of the PPC triggers the obligation for the employer/client to make the payment within a certain period.
In accordance with the VAT GRE1, the issuance or certification of progress payment certificates within the construction project will not trigger the date of supply for VAT purposes.
This comes as a desired update for the contractors who were concerned that VAT will become due upon issuance of PPC, in particular if the client contests the same or does not make the payment on time.
“It is often the case where large construction projects are concerned that a retention clause will be included within the contract. A retention clause allows the customer to hold back a proportion of the contract price once the work has been completed, pending confirmation that the supplier has done the work properly and has rectified any immediate faults that might be found.
Often the retention amount is not payable by the customer until an agreed period of time has passed, and in some cases where the customer is not satisfied with the quality of the work, the retention payment will be retained by the customer.”
The date of supply rule applicable in general to any contract that includes periodical payments such as construction contracts is Article 26 of VAT Law No. 8/2017. Article 26 provides that date of supply shall be the earliest of:
· 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.
Naturally, the above rules would have been applicable to Retention withheld pursuant a construction contract; however, the VAT GRE1 carved out the retention from the remit of Article 26 and stated that the normal rule of date of supply will be applicable i.e pertinent provisions of Article 25 of VAT Law No. 8/2017 which determine the date of the supply as the earlier date of:
· The time the retention payment has been made;
· The work has been signed off as complete; or
· The tax invoice has been issued.
Furthermore, the VAT GRE1 stated 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. 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.”
That said, if a retention is due at the end of the defects liability period that comes 12 months after substantial completion and the client does not release the retention to the contractor, the date of supply shall not be triggered, and the contractor shall not be liable to pay VAT.
Retention payment for services completed before 01 January 2018
Where retention payment is to be made after 01 January 2018 but the services were completed before 01 January 2018, the payment of the retention will be outside the scope of VAT. Since retentions are usually held for 12 months or more, retention of many of the projects completed before 01 January 2018 are due to be paid in 2018 or 2019.
ConclusionThus the VAT GRE1 comes as a relief to the construction industry in general and to the contractors and sub-contractors in particular. It will add more certainty to the balance sheets and cashflows of the businesses and remove the risk associated with paying VAT before the contractors have received the payment.