December 2017 saw quite a windfall for the UAE construction industry – with the implementation of Value Added Tax (VAT) looming, the most commonly used phrase became, ‘invoice now.’ The introduction of VAT is a GCC wide phenomenon that is touted to diversify the region’s dependency on oil. According to the International Monetary Fund, the introduction of 5% VAT will translate to revenue equating to 1.6% of the GCC’s GDP. While this diversification is of particular importance to the region, the question is how it will affect the construction industry in the short, and in the long term.
The risks associated with the implementation of VAT within the construction industry could see companies and developers facing pressure in meeting monthly and quarterly commitments. Once the industry garners a greater understanding of the process, the impact to cash flow and the industry as a whole will be greatly mitigated. This requires a new avenue of financial innovation and disruption, and in today’s sharing economy, information is easily accessed through communication platforms. Specializing in construction intelligence, ProTenders is one such platform; it enables the construction sector to leverage accurate market-specific data to find new project partners and mitigate risk while growing business revenues.
The implementation of VAT in on-going projects
Major construction projects tend to have lead times of a number of years, and many projects due to be completed in the future will not have factored VAT. In such cases, VAT will be triggered at payment milestones or when the final invoice is issued – this will influence construction at the cost or the revenue side. Where VAT has not been accounted for, contractors bear the onus of responsibility in negotiating an agreed price inclusive of VAT. Failing to do so will inevitably see the contractor bearing the price of the VAT, or alternatively passing it on to the developer, depending on his agreement with the end user.
How working with subcontractors will affect VAT?
As VAT registration has a revenue threshold of AED375,000 (or USD102,000), many smaller sub-contractors that fall below this bracket are not required to register. As a result, these businesses will be ineligible to recover VAT incurred on costs. However, sub-contractors that fall below the threshold, yet above the turnover of AED187,500 (or USD51,000) are eligible to register voluntarily for VAT. Considering this option would be more advantageous for smaller sub-contractors who want to enhance their professional perception within the construction industry and avoid paying penalties should they exceed the VAT threshold during the year.
Dealings with other GCC countries
According to UAE law, when it comes to cross border transactions, VAT will apply at the place of supply. In the case of real estate services, VAT will be accounted at the location of the property; while in construction services VAT will be applied at the location where such services are performed.
For instance, currently, the UAE treats movement of goods and services between the UAE and the Kingdom of Saudi Arabia (KSA) as ‘Non-GCC’ exports and ‘Non-GCC’ imports for a transitional period. UAE resident suppliers providing KSA resident customers general services will treat these as falling within the scope of UAE VAT, regardless of the customers’ VAT status in KSA. As this will be considered a non-GCC recipient, the VAT amount will be 0%. If UAE suppliers are dealing with customers registered for VAT in KSA, these services will have to be reported as ‘zero-rated’ supplies, as opposed to intra-GCC supplies. On the other hand, customers that are not registered for VAT in KSA will be subject to a 0% UAE VAT rate instead of 5%. As these are measures undertaken for a transitional period only, it is vital that companies in the construction sector continue to stay updated on the regulations in the UAE and the GCC.
What are the VAT exclusions?
According to the GCC Unified VAT Agreement, there is a level of flexibility that is applicable when it comes to VAT exclusions. Member states are permitted to exempt, zero-rate or standard-rate building material supplies. Currently, there is no specific relief for the construction sector in the UAE, and players in the sector will have to apply the standard rate of VAT. However, there are several exceptions for the real estate sector: UAE citizens are exempt from VAT on the construction of their private homes, new residential housing will be zero-rated and developers that build residential housing within three years will also be eligible to apply for zero-rating, enabling them to recover costs.
VAT signifies a major transformation across the construction landscape. While the end consumer is expected to bear the impact of VAT costs, this is not viable as not all VAT will be recoverable. This will, inevitably lead to a modest increase in construction costs, and one of the biggest risks in the industry will be the impact on cash flow.