Digital construction management can support VAT accounting
CCS's Andrew Skudder explains how specialist construction software can help building firms streamline VAT-related tasks
The impact of VAT on construction projects – and contractors – can be better understood through the adoption of specialist software, as Andrew Skudder, CEO of building technology giant Construction Computer Software (CCS), explains.
Towards the end of 2017, it was established that the proposed introduction of value-added tax (VAT) in the UAE would soon happen. You might remember a discernible uplift in cash flow at the time, as companies invoiced and billed to beat the 5% levy they expected to incur following the launch of VAT. That was, of course, a blip, but the forecasted benefit in VAT revenue for the UAE was expected to contribute significantly to the country’s GDP.
Little over a year later, VAT is still relatively new in the country, but is rapidly becoming an embedded part of everyday life in the UAE. However, there are still many areas of uncertainty, and the knowledge of process and procedures is in its infancy, but as the old saying goes, ignorance is no defense when it comes to law.
It is not unlikely that some business-owners, including those in the construction sector, may struggle to understand their responsibilities in terms of VAT collection or payment. Fortunately, there are tools that can help construction professionals in dealing with VAT and any other form of change or development in all types of taxation.
More importantly, while software designed and developed to incorporate and calculate tax for you has been in use all around the globe, it is important that our sector’s decision-makers opt for tools that were designed specifically for construction companies and contractors. Indeed, CCS’s BuildSmart platform could be the answer to your VAT queries and more, but first, let us understand the basics of VAT in the UAE, and how it impacts your firm.
The short-term challenge of VAT was felt on cash flow and working capital. Five-percent could be considered a relatively low figure compared to most other countries that charge various taxes, when working on large scale projects such as construction, that 5% can, quite literally, equate to millions of dollars.
There was also some complacency leading up to the VAT start date, and many believed it would be postponed due to the need for more planning and infrastructure – this certainly left a significant section of industry rather unprepared to deal with VAT.
Lack of preparation and planning was a real risk particularly for the construction industry, where margins are often tightened to as low as 10% meaning failure to plan for VAT can represent slashing the potential profit by half – or more, considering cost and time over-runs.
This is even more important given the end-to-end process of large construction projects. When factoring in the pre-build elements from design, raising capital, and bidding, projects that were coming online at the time that VAT was introduced, were unlikely to have factored its cost into their overall financials.
One element to mitigate VAT liability as a whole is in claiming an adjustment in terms of VAT that is payable, and has already been paid, along the process. As the threshold for compulsory registration was set at the equivalent of SAR 375,000, many smaller organisations may have elected to not register.
While software designed and developed to incorporate and calculate tax for you has been in use all around the globe, it is important that our sector’s decision-makers opt for tools that were designed specifically for construction companies and contractors.
This, in turn, may have been counterproductive, as these companies are not able to reclaim or adjust against VAT they have paid. The need to maintain detailed records and apply VAT off-sets led to some contractors being excluded from consideration by developers, unless they had a VAT registration number. As such, this is likely to 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 – meaning, the point at which a service or product is supplied. However, for an interim period, such activity, involving different GCC countries, would be deemed non GCC import/exports. In such a scenario, the transaction’s treatment would be as service delivered to a non-GCC entity, and the VAT would be at 0% – regardless of the VAT status of the receiving company.
For example, a Saudi VAT-registered company receiving services from a UAE construction company would be viewed as having received a zero-rated service. If the company was not VAT-registered in Saudi Arabia, then it would be subject to VAT in the UAE – but at 0%.
In the complex and multi layered world of construction, you must rely on the tried-and-tested systems that have been designed specifically for construction companies. Platforms such as BuildSmart and Candy by CCS can capture, collate, and cross reference all elements from your end-to-end process and allow accounting teams to access information in real time. This will help you mitigate the risk of VAT-related penalties now, and even if the framework changes over time.