Towards the end of 2017 and the realisation that the proposed introduction of VAT to the UAE was going to happen, you might remember a discernible uplift in cash flow as companies invoiced and billed to beat the 5% levy about to be incurred. That was, of course, a short-lived blip whereas the forecast benefit in VAT revenue for the UAE was likely to be somewhere in the region of a 1.6% increase in the regions GDP. An important factor in diversifying revenue but what would be the impact on the economy and, for the purpose of this article, the construction industry.
The short-term challenge would be an impact on cash flow and working capital. Although 5% could be considered a relatively low figure when compared to most other countries that charge various taxes, when working on large scale projects such as construction, that could equate to literally millions of dollars. There was a good deal of complacency leading up to the VAT start date. Many believed it would be postponed due to the need for more planning and infrastructure which certainly left a significant section of industry not having fully prepared. Lack of preparation and planning was a real risk particularly as margins in the construction industry had been tightened to as low as 10% meaning failure to plan for VAT could represent slashing the potential profit by half (even more when considering cost and time over-runs).
Let’s consider the end-to-end process in large construction projects.
- When factoring in the pre-build elements from design, raising capital and bidding, projects that were coming on-line round the introduction of VAT were unlikely to have had VAT factored into the financials.
- VAT would, however become payable at each stage and transaction going forwards.
- Depending on the specific language used in the various contracts (and the lack of specific clauses relating to the handling of VAT), the burden of the new tax was to fall on the contractors or the developers.
- Indeed, the process is still relatively new today and the handling of returns and off-sets can still prove tricky where linked and aligned processes are not in place.
One element to mitigate VAT liability as a whole is in claiming an adjustment against VAT payable against VAT already paid along the process. As the threshold for compulsory registration was set at SAR 375,000 (or the equivalent in other GCC states), many smaller organisations may have elected to not register (voluntary registration being permitted for companies with a turn-over of SAR 187,500) which may have been counterproductive as they are not able to reclaim or adjust against VAT they have paid. Indeed, the need to maintain detailed records and apply VAT off-sets lead to some contractors being excluded from consideration by developers, unless they had a VAT registration number, and as such, will have cost them dearly.
Things get a little more complicated when dealing with cross GCC supply. VAT is normally deemed payable at the point of delivery ie: the point at which a service or product is supplied. That being said, for an interim period, such activity, involving different GCC countries, will be deemed non GCC import/exports. This would mean:
- The treatment would be as service delivered to a non-GCC entity where the VAT would be at 0% regardless of the VAT status of the receiving company.
- As an example, a Saudi VAT registered company receiving services from a UAE construction company would be considered as in receipt of a zero rated service whereas if they were not VAT registered in the KSA, they would be subject to UAE VAT but at 0%.
- As mentioned, this is the current position to ease the transition and staying completely informed and ahead of the game as these elements develop, will be essential.
We have really only scratched the surface of the impact of VAT but it is already apparent that it is potentially very confusing with many pitfalls. Fortunately, there are tools designed to help construction professionals in dealing with VAT and any other form of change or development in all types of taxation. Software designed and developed to incorporate and calculate tax for you have been in use all around the globe and such tools exist specifically for construction companies and contractors. Contact CCS to find out how BuildSmart could be the answer to your VAT questions and more.