The UAE heavily relies on the construction industry in the context of economic growth. The sector is very important in the development of the country in residential high-rise buildings, as the commercial buildings. However, the construction services taxation has changed dramatically as the UAE enacted the VAT (Value Added Tax) in 2018.
VAT on construction services is a vital thing that needs to be understood especially by the developers, contractors, subcontractors and property owners. The My Taxman guide is a clear overview of how VAT is applied to the construction industry, registration requirements, tax, and a roadmap of fulfilling the same by 2025.
The VAT on construction services may be defined as the 5% value added tax levied on the supply of goods and services in the construction sector including building materials, labor, design, and supervision.
The UAE Federal Tax Authority (FTA), indicated that the majority of construction activities (commercial or residential) are liable to VAT, unless mentioned otherwise.
In simple terms, as a contractor or developer, providing services related to construction, you are forced to charge and collect VAT on what you have provided.
Applicability of VAT in the Construction Industry
In the UAE, VAT is implemented under the condition of the kind of the project and the nature of supply. And now feel through the circumstances:
1.Commercial Properties
- The commercial buildings are 5 % value added tax construction and sale.
- These are offices, malls, warehouses and industrial units.
- The developers are allowed to claim the input value added tax on the costs related to constructions.
2.Residential Properties
- Zero-rated (0% VAT) will be the initial supply of a newly constructed residential premise within the first 3 years of construction.
- Any subsequent sales or leases are exempt from VAT
- The suppliers and the contractors are advised to be keen on differentiating between the first and subsequent supplies so that they can be able to make the value added tax
3.Mixed-Use Developments : The residential and commercial use projects will be required to apportion value added tax.
This would be the case of a commercial (retail) building on the ground level and residential apartments on the top level which would demand two types of value added tax treatment.
VAT Registration for Construction Companies
Any company that deals in construction business must identify whether it needs to be registered on value added tax.
VAT Registration Threshold:
- Compulsory Registration: When annual taxable supplies are over AED 375,000.
- Voluntary Registration: if annual supplies exceed AED 187,500.
Construction industry players that involve subcontractors, suppliers or even real estate developers must make sure they are registered within the given time lapses to avoid penalty.
VAT Input and Output Tax in Construction
To prevent money flow and comply with the requirements, input and output value added tax knowledge is required.
Output VAT
Applied by the construction companies during the delivery of taxable services or provision of materials.
E.g. a contractor is asked by the client to pay AED 1,000,000 + 5 % VAT = AED 1,050,000.
Input VAT
constructor payment Are paid when constructing purchases of building materials, machinery, or subcontractor services.
An example: In cases where the contractor pays AED 100,000 as VAT on the goods purchased, then he will get an input value added tax credit with the FTA.
The difference between output and input value added tax is known as the payable or refundable value added tax.
VAT on Subcontractors and Suppliers
The construction sector is highly reliant on subcontractors and consultants as well as suppliers. Here’s how value added tax applies:
- The subcontractors that provide services (e.g. electrical, plumbing or flooring services) must charge a 5 % value added tax.
- The developers or main contractors can charge these costs as input VAT credit.
- The invoices should be correct and meet standards of FTA to avoid disallowance of credits.
Zero-Rated and Exempt Construction Services
The UAE value added tax law provides the zero-rating or exemption of some construction services:
Zero-Rated:First provision of new residential dwelling (less than 3 years).
Constructing buildings which have charitable uses.
Exempt: Subsequent residential construction sales or lease.
Bare land transactions.
Companies should be able to differentiate the zero and exempt supplies where only the former is allowed to receive input value added tax
Penalties for Non-Compliance
Breaking the VAT laws in the UAE can lead to the extreme penalty, including:
- Late registration fines.
- Incorrect VAT filings.
- Non-issuance of tax invoices.
- Late payment of value added tax dues.
A good option in evading punishment and securing your business is to hire a professional tax consultancy.
CONCLUSION
Imposing value added tax on the construction service may prove to be a complicated process especially in the cases of different types of projects, invoices, and the varying taxation provisions. You can be a developer, contractor or a supplier but in order to achieve success in the business it is obligatory to be on the same pace with value added tax in the UAE.
To streamline the operation of the construction firms, we can also improve on the process of value added tax compliance at My Taxman by offering professional consultation, proper filing and efficient tax planning to the companies.
Contact My Taxman at +971-543223140 and make sure that your construction projects are in a VAT-compliant penalty-free and cost effective manner.
Frequently Asked Questions
Q1. What is the VAT rate in UAE?
Most of the construction related services and goods are taxed at the standard VAT rate of 5 percent.
Q2. Is payment of VAT on construction of residential property obligatory?
Yes, but the first supply of new residential buildings in 3 years is complimentary.
Q3. Claiming input VATs by the construction companies?
The developers and contractors are allowed to claim input VAT of materials, services, and expenses incurred on taxable projects.
Q4. Is it applicable to VAT to government or charity buildings constructions?
The answer to that is yes, there exists a zero-rate construction of the properties of charitable organizations as per the UAE VAT law.
Q5. What can My Taxman help achieve House of compliance in VAT?
My Taxman is another business that offers VAT consultancy, registration, filing, and refund to the construction industry in the UAE.
