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VAT on retention money

Retention Money

Retention money is referred to as the sum of money held by the employer as a safeguard for any defects or non-conforming work by the contractor.

Treatment of Retention Money

Retention money in business and contracting refers to a percentage of the contract value that is withheld by the client or customer for a specified period after the completion of a project. The purpose of retention is to ensure that the contractor fulfills all contractual obligations, including addressing any defects or issues that may arise after project completion. Here’s how retention money is typically treated:

1. Withholding During the Project:

   – The client withholds a percentage of the contract value (often around 5-10%) during the project.

   – This withheld amount is usually released upon substantial completion of the project but may continue to be retained until final completion.

2. Release Conditions:

   – Retention is often released in stages based on project milestones, such as achieving substantial completion or passing inspections.

   – Some contracts may release a portion of the retention after a certain period following substantial completion, with the remainder released at final completion.

3. Defects Correction Period:

   – The retention period serves as a defects liability period during which the contractor is responsible for rectifying any defects or issues that arise.

   – If defects are identified during this period, the client can use the retained funds to cover the cost of necessary corrections.

4. Interest on Retention:

   – In some cases, clients may be required to pay interest on the retained amount, especially if the retention period extends beyond a specified timeframe.

5. Agreements and Contracts:

   – The treatment of retention money is typically outlined in the construction contract or agreement between the parties.

   – The contract specifies the percentage of retention, conditions for release, and any penalties or interest associated with late release.

6. Release Certificate:

   – Upon meeting the conditions for release, the contractor may submit a formal request for the release of retention money.

   – The client issues a release certificate, and the funds are then released to the contractor.

7. Accounting Treatment:

   – Contractors often account for retention as a liability on their balance sheets until it is released.

   – Once released, the liability is reduced, and the corresponding revenue or income is recognized.

Properly managing retention is essential for maintaining positive contractor-client relationships and ensuring that the project’s contractual requirements are met satisfactorily. The specific details of retention treatment can vary based on the terms outlined in the contract.

VAT on retention money

The treatment of Value Added Tax (VAT) on retention money can vary based on the jurisdiction and the specific regulations in place. In many VAT systems, the general principle is that VAT is due when a taxable supply of goods or services occurs. Here are some considerations regarding VAT on retention money:

1. Timing of VAT Liability:

   – In some jurisdictions, VAT may be triggered when the retention money is invoiced or received, depending on the tax point rules.

   – Other jurisdictions may require VAT to be accounted for when the actual supply of goods or services takes place, which might be upon project completion.

2. Consideration as a Deposit:

   – Some tax authorities consider retention money as a deposit rather than a payment for goods or services. In such cases, VAT may not be immediately due on the retention amount.

3. Release of Retention and VAT:

   – When retention money is released to the contractor, VAT may become payable, especially if the release is considered a separate taxable supply.

   – The timing of when VAT becomes due upon the release of retention can vary based on local regulations.

4. Interest and Penalties:

   – Late payment or non-payment of VAT on retention money may attract interest or penalties, so it’s important for businesses to adhere to VAT regulations and timelines.

5. Documentation and Invoices:

   – Proper documentation, including invoices and contractual agreements, is essential for determining the correct VAT treatment on retention money.

   – Invoices should clearly state the VAT implications, and contracts should specify the timing and conditions under which VAT becomes due.

6. Consultation with Tax Advisors:

   – Due to the complexity of VAT regulations and variations between jurisdictions, businesses are advised to consult with tax advisors or local tax authorities to ensure compliance.

It’s crucial for businesses to stay informed about the specific VAT rules in their jurisdiction and to adapt their practices accordingly. The treatment of VAT on retention money may also be influenced by the nature of the contract, the industry, and the legal framework governing VAT in a particular region.

VAT on retention money in the UAE

There are specific guidelines in the United Arab Emirates (UAE) follows a VAT (Value Added Tax) system, regarding the treatment of VAT on retention money. However, tax regulations are subject to change, and it’s essential to refer to the most recent and relevant sources or consult with tax professionals for the latest information.

As a general guideline based on previous information:

1. Retention Money as Consideration:

   – In the UAE, if retention money is considered as part of the consideration for a taxable supply of goods or services, VAT may be applicable.

2. Timing of VAT Liability:

   – VAT liability is generally triggered when a taxable supply occurs. In the context of retention money, this may be when the supply of goods or services, for which the retention is held, is completed.

3. Release of Retention and VAT:

   – The release of retention money may be considered a separate taxable supply. VAT could be applicable when the retention money is released, depending on the specific circumstances and the nature of the underlying supply.

4. Documentation and Invoices:

   – Proper documentation, including invoices and contractual agreements, is crucial for determining the correct VAT treatment on retention money in the UAE. Invoices should clearly indicate the VAT implications.

5. Consultation with Tax Authorities:

   – Businesses operating in the UAE are encouraged to consult with the Federal Tax Authority (FTA) or seek advice from tax professionals to ensure compliance with the latest VAT regulations.

It’s important to note that tax regulations are subject to updates and amendments. Therefore, businesses should stay informed about any changes to VAT rules in the UAE and adjust their practices accordingly. Always refer to the latest information from official tax authorities or seek guidance from tax experts for the most accurate and up-to-date advice.

Dates to be considered

VAT shall be due on the retention amount at the earliest of the following dates:

• Payment of retention
• Work signed off as complete
• Issue of tax invoice

VAT on insurance premiums paid for employees

Who is an Employee?
An employee is one who is employed by the company (employer) based on a contract in an employee-employer relationship to assist the company in various domains specified in the contract.

What is insurance? (Source: Investopedia.com)

Insurance is a contract in which an individual or entity pays an insurance company in exchange for financial protection or reimbursement of losses resulting from a covered event

What is an Insurance Premium?

An insurance premium is an amount to be paid for a contract of insurance taken by a party

What are the types of insurance?

• General Insurance
  • Health insurance
  • Motor insurance
  • Home insurance
  • Fire insurance
  • Travel insurance
• Life Insurance
  • Term life insurance
  • Whole life insurance
  • Endowment plans
  • Unit-linked Insurance plans
  • Child plans
  • Pension plans

What are the types of insurance in the UAE?

• Life Insurance
• Marine Insurance
• Property Insurance (motor, fire, marine)
• Liability Insurance
• Health Insurance

What are the types of health insurance plans in the UAE?

• Individual health insurance plans
• Family health insurance plans
• Senior citizen insurance plans
• Group/ Employee insurance plans
• Critical illness insurance plans

Input Tax Credit (ITC) on insurance premium paid for employees

The VAT law mentions two circumstances where an employer is able to reclaim VAT on employee benefits.

• Where there is a legal obligation to provide such benefits
• Where there is a contractual obligation or documented policy to provide those benefits to employees.

Reverse Charge Supplies

What is Reverse Charge Mechanism?

The reverse charge mechanism is a provision in Value Added Tax (VAT) systems where the responsibility for reporting and paying the tax is shifted from the supplier to the recipient of the goods or services. Instead of the supplier charging and collecting VAT from the buyer, the recipient accounts for both the input tax (VAT on purchases) and output tax (VAT on sales) in their VAT return.

Key points regarding the reverse charge mechanism:

1. Nature of Transactions:

   – The reverse charge mechanism typically applies to specific types of transactions, often involving services or goods with certain characteristics.

2. Business-to-Business Transactions:

   – It is commonly applied to business-to-business (B2B) transactions, especially when the supplier and recipient are both registered for VAT.

3. Importance of Registration:

   – Both the supplier and recipient must be registered for VAT for the reverse charge mechanism to apply.

4. Reporting and Payment:

   – The recipient reports the VAT on both the input and output sides of the transaction in their VAT return. They pay the output tax on their sales and simultaneously reclaim the input tax on their purchases, resulting in a net payment or refund position.

5. Prevention of Tax Evasion:

   – The reverse charge mechanism is often implemented as a measure to prevent tax evasion, especially in cross-border transactions.

6. Common Scenarios:

   – Common scenarios where the reverse charge mechanism may be applied include services provided by non-resident suppliers to local businesses or certain goods and services specified by tax authorities.

7. Administrative Simplification:

   – The reverse charge mechanism can simplify the administrative process, as it reduces the need for non-resident suppliers to register for VAT in every jurisdiction where they provide taxable services.

8. Compliance Requirements:

   – Businesses must be aware of and comply with the specific rules and regulations related to the reverse charge mechanism in their respective jurisdictions.

It’s important to note that the application and details of the reverse charge mechanism can vary between countries, and businesses should refer to the specific VAT regulations in their jurisdiction for accurate and up-to-date information.

Reverse Charge supplies in the UAE

The United Arab Emirates (UAE) applies the reverse charge mechanism in specific situations as outlined in the UAE VAT law. The reverse charge mechanism in the UAE is primarily applicable to designated zones and certain imported services.

Here are key points regarding reverse charge supplies in the UAE:

1. Designated Zones:

   – The reverse charge mechanism applies to supplies of goods and services within designated zones in the UAE. Designated zones are specific areas that meet criteria established by the UAE Cabinet.

2. Imported Services:

   – For certain imported services, the responsibility for reporting and paying VAT may shift to the recipient rather than the supplier. This applies when the services are supplied by a non-resident to a VAT-registered business in the UAE.

3. Conditions for Application:

   – The reverse charge mechanism is generally applicable when a taxable supply is made by a non-resident supplier to a VAT-registered recipient in the UAE.

4. Reporting and Payment:

   – In reverse charge scenarios, the recipient of the goods or services is required to account for both the input tax (VAT on purchases) and the output tax (VAT on sales) in their VAT return.

5. Designated Zones and Customs Territory:

   – Supplies between businesses within designated zones are considered to be outside the scope of VAT if certain conditions are met. However, if goods move from a designated zone to the customs territory, the reverse charge mechanism may apply.

6. Verification of Supplier’s VAT Registration:

   – To apply the reverse charge mechanism, the recipient must verify that the supplier is not established in the UAE or does not have a fixed establishment from which the supply is made.

7. Documentation Requirements:

   – Proper documentation, including invoices and relevant records, is crucial for compliance with the reverse charge mechanism. Invoices should clearly indicate the applicable VAT treatment.

It’s important to note that tax regulations are subject to updates and amendments. Businesses operating in the UAE should refer to the latest VAT regulations issued by the Federal Tax Authority (FTA) for the most accurate and current information on reverse charge supplies.

These are the various supplies for which Value Added Tax (VAT) is payable by the recipient of the supply, i.e the customer: 

1. Import of goods/ services from other GCC and non-GCC countries. The supplier of these goods/ services must be located in another country, and they may or may not have a business in the UAE
2. Purchase of goods from a designated zone
3. Supply of gold and diamonds
4. Purchase of gold and diamonds for resale or further production/ manufacture
5. Supply of hydrocarbons for resale by a registered supplier to a registered recipient in the UAE
6. Supply of crude/ refined oil by a registered supplier to a registered recipient in the UAE
7. Supply of processed/ unprocessed natural gas by a registered supplier to a registered recipient in the UAE
8. Production and distribution of any form of energy supplied by  a registered recipient in the UAE

Treatment of VAT on services rendered in designated zones

VAT on services rendered in designated zones

The treatment of Value Added Tax (VAT) on services rendered in designated zones in the United Arab Emirates (UAE) follows specific rules outlined in the UAE VAT law. Please note that tax regulations are subject to change, and it’s essential to refer to the most recent and relevant sources or consult with tax professionals for the latest information.

Here are some key considerations regarding VAT on services rendered in designated zones in the UAE:

1. Supplies Within Designated Zones:

   – Supplies of goods or services between entities within the same designated zone are generally treated as outside the scope of UAE VAT.

2. Criteria for Designated Zones:

   – Designated zones must meet certain criteria as specified by the UAE Cabinet. These criteria include having defined security measures and Customs controls.

3. VAT Treatment of Services:

   – Services provided within designated zones may be subject to specific VAT treatment, and the application of the reverse charge mechanism may depend on the nature of the services and the VAT status of the supplier and recipient.

4. Imported Services:

   – If services are imported into a designated zone from a non-resident supplier, the reverse charge mechanism may apply, and the responsibility for reporting and paying VAT could shift to the recipient.

5. Documentation and Compliance:

   – Proper documentation, including invoices and contractual agreements, is crucial for compliance with VAT regulations. Invoices should clearly indicate the applicable VAT treatment.

6. Verification of VAT Registration:

   – Businesses operating in designated zones should verify the VAT registration status of their suppliers and ensure that proper compliance measures are in place.

It’s important to keep in mind that tax regulations can evolve, and any changes to VAT rules in designated zones or other aspects of the UAE VAT law may have occurred since my last update. Therefore, businesses are strongly advised to consult with the Federal Tax Authority (FTA) or seek advice from tax professionals to ensure compliance with the latest VAT regulations in the UAE.

Designated Zones

There are a total of 19 designated zones in the United Arab Emirates. They are listed as follows:

Abu Dhabi (3 zones)

1. Free Trade Zone of Khalifa Port

2. Abu Dhabi Airport Free Zone

3. Khalifa Industrial Zone

Dubai (7 zones)

1. Jebel Ali Free Zone (North-South)

2. Dubai Cars and Automotive Zone (DUCAMZ)

3. Dubai Textile City

4. Free Zone located in Al Quoz Area

5. Free Zone located in Al Qusais Area

6. Dubai Aviation City

7. Dubai Airport Free Zone (DAFZ)

Sharjah (2 zones)

1. Hamriya Free Zone

2. Sharjah Airport International Free Zone

Umm Al Quwain (2 zones)

1. Umm Al Quwain Free Trade Zone in Ahmed Bin Rashid Port

2. Umm Al Quwain Free Trade Zone on Sheikh Mohammed Bin Zayed Road

Ras Al Khaimah (3 zones)

1. RAK Free Trade Zone

2. RAK Maritime City Free Zone

3. RAK Airport Free Zone

Fujairah (2 zones)

1. Fujairah Free Zone

2. Fujairah Oil Industry Zone (FOIZ)

FTA directive on tax returns

FTA issues directive on alternative deadline to file tax returns (28th May 2020)

The Federal Tax Authority (FTA) issued a directive on an exceptional basis providing an alternative date of May 28, 2020. This is for submitting VAT returns and the payment of due tax for the tax period ended March 31, 2020. Therefore, enabling taxable persons to meet their tax obligations without facing any difficulties.
This comes in light of its commitment to supporting VAT registrants and the unprecedented intensive precautionary measures. Undertaken by the UAE to curb the spread of the novel Coronavirus (COVID-19) imposing 24-hour restrictions. on the movement of individuals and vehicles implemented in certain areas of the UAE, which coincided with deadlines for filing VAT Returns.
In a press statement issued, the FTA confirmed that, as per the directive, VAT registrants who have monthly tax periods must submit their returns, and settle the payable tax for the tax period from March 1 to March 31, 2020, no later than Thursday, May 28, 2020. Meanwhile, VAT registrants having quarterly tax periods must submit their returns and settle the payable tax for the tax period from January 1 to March 31, 2020, by Thursday, May 28, 2020.
The FTA urged VAT registrants to ensure the data they include in their VAT returns is accurate and to also ensure that the FTA receives the payable tax for the tax period ending March 31, 2020, by Thursday, May 28, 2020, calling on all registrants to continue to abide by all other tax obligations as usual. This exceptional directive for the deadline pertains only to VAT Returns for the tax periods that ended on March 31, 2020, and does not affect any other tax periods where the deadline for filing tax returns and settling payable taxes does not fall in April 2020.

How can BHMJ help you?

BHMJ provides complete VAT solutions, including VAT registration, compliance support, VAT Return filing services in Dubai, and ongoing advisory services. Our team of VAT consultants in Dubai is dedicated to helping your business navigate the complexities of VAT regulations and achieve optimal tax efficiency. Contact us today to learn how we can support your VAT compliance needs and contribute to your business success.