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).
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.
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.