Construction firms should be wary of VAT-related cashflow issues

A recent study found that construction-related companies delayed payments by an average of 123 days last year
In a recent study, credit insurer Coface found that construction-related companies across the UAE last year delayed payments by an average of 123 days longer than the contracted payment schedule.
By Bernd Debusmann Jr
Thu 01 Feb 2018 09:30 AM

Suppliers need to take proactive measures to protect themselves from cashflow issues in the wake of the implementation of value-added tax (VAT), according to a UAE-based construction expert.

Zander Muego, a partner at Thomas & Adamson, an international project management and cost consultancy firm, explained that “the construction sector is particularly prone to cashflow challenges due to the extended value chain and cash intensive nature of the industry.

“With cashflow already a major issue, the introduction of VAT is likely to exacerbate this problem,” he added.

In a recent study, credit insurer Coface found that construction-related companies across the UAE last year delayed payments by an average of 123 days longer than the contracted payment schedule.

“The issue surrounding cashflow will arise as VAT falls due when the supplier raises a VAT invoice, irrespective of the payment date of that invoice,” Muego 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.”

Muego noted that since a company will issue a VAT invoice before it receives payment from a customer, VAT will need to be accounted for in the VAT return that covers the time at which the invoice was issued.

If the customer doesn’t pay the invoice within six months of the due date, the supplier will be able to claim ‘bad debt relief’, a refund from the authorities of the accounted-for VAT.

“In practice, while this should somewhat ease the impact, it is still a retrospective action that comes after damage from the initial cashflow shortage has been suffered, such as job losses or harm to reputation,” Muego said.

Muego added that around the world, systems are in place to avoid such problems. In the UK, for example, HM Revenue and Customs ‘cash accounting scheme’ allows companies to issue a demand for payment after receiving the certification from the customer, in order to avoid triggering a VAT liability before receiving the payment.

“The demand for payment is not a VAT invoice and has no VAT consequences, but allows the customer to see the VAT amount due,” Muego noted. “The customer then pays the VAT amount demanded, triggering the VAT obligation – at that point, the construction firm has received payment without causing a cashflow issue.”

Muego said he believes that the industry needs to come together in an effort to honour agreed payment terms, with the support of a “robust legal process” to ensure enforcement.

“As it stands, while everyone will be impacted, the impact on small to medium sized entities within the construction industry could be fatal,” he said. “There is a significant risk that added cashflow pressures will push some businesses that are already struggling over the edge.”

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Last Updated: Thu 01 Feb 2018 09:08 AM GST

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