UAE government recently announced to introduce value-added tax (VAT) at the rate of 5%, implementing from January 1, 2018. VAT has also been implemented simultaneously in all GCC countries.
Companies in UAE, Saudi Arabia, Bahrain, Oman, Qatar and Kuwait having annual revenues of more than $100,000 will register for tax. It is anticipated that at least 95% of companies will conform during initial phase. If you want to know why VAT has been introduced and what will be its implications, read more in our blog here.
Impact of VAT on Construction Sector
Although some sectors are exempted from VAT, construction sector is not one of them. Rather it will be affected greatly in terms of overall increase in construction costs as well as increase in cost of building materials. Construction industry across all GCC nations should prepare itself to deal with VAT.
- Short term planning must involve the companies to prepare themselves for compliance arrangements, analyze cash-flow implications, secure invoicing and include this new reform in their future contracts.
- In the longer run, impact would be less as the cost of construction projects is completely recoverable in terms of VAT perspective. It will gradually become part of business environment.
Challenges Faced By Construction Sector Due To VAT
- Construction sector faces huge challenge in terms of time limit for introduction of VAT simultaneously across GCC so as to lower the risk of arbitrage between nations. Companies have just 9 months to build the system, educate their staff about the reform and to possibly restructure themselves. This would be quite difficult.
- UAE has been tax free for most of its history. To accurately and timely comply with VAT regulations would be difficult but is quite necessary to avoid fines, interest and penalties.
- Implementation of VAT in companies’ systems will be very costly for big firms. They will have to hire accountants for smooth transition and compilation of paperwork and also to train employees adapt to this new system.
Cash Flow Issues
Cash flow has already been a major issue for construction companies and introduction of VAT has aggravated the problem even more. Zander Muego, a UAE based construction industry expert specified that construction sector is facing this challenge due to prolonged value chain and cash intensive nature of industry.
“The issue surrounding cash flow will arise as VAT falls due when the supplier raises a VAT invoice, irrespective of the payment date of that invoice,” Muego further added. “With the VAT then being accounted for by the supplier in the VAT return period in which the invoice falls, payment will be required whether or not they have been paid.”
Research Finding Of “Coface”
The analysis of Muego is backed up by a recent study conducted by credit insurer “Coface”. According to its findings, construction related companies in UAE delayed their payments by an average of 123 days extended than the contract payment schedule.
Muego mentioned that company issues VAT invoice before receiving payment from customer, so VAT will be accounted for in VAT returns that should cover the time that invoice was issued.
Not payment of invoice by the customer within 6 months of due date will result in “bad debt relief”. It is a refund from authorities to cover the amount accounted for VAT. Although this move will lessen the impact, still it is an action that will come after harming initial cash flow. The impact of VAT on small and medium companies in construction sector would be more as they are already struggling over the edge.
In order to avoid potential cash flow issues due to VAT, suppliers will have to take proactive measures. Construction industry should come together for agreement in payment terms along with a strong legal procedure to ensure the implementation of that agreement.
If you want more information on impact of VAT in construction sector of UAE, contact our representatives at KWSME. We provide consultation to businesses looking for company formation in Dubai and UAE.