VAT in the UAE: How Will It Affect Construction?

The introduction of VAT into the UAE marks the end of tax-free living in the Middle East. This move is expected to generate Dh12 billion in the first year, and is part of the Gulf Co-Operation Council (GCC) countries’ plans to reduce their dependence on oil as a revenue stream. But how will the construction industry be affected?

The Facts

VAT will be introduced on the 1 January 2018 at a rate of 5% on goods and services that are not VAT exempt or zero-rated. Goods which will be subject to VAT will generally be items such as food or construction materials, whereas services will include consulting services and maintenance works.

All UAE-resident businesses must register for VAT if they make taxable supplies or imports over AED375,000, but businesses can voluntarily register for VAT if this threshold is AED187,500 or higher. However, it’s important to note that some areas are taxed differently (Deloitte) between the UAE and Saudi Arabia, so not all GCC countries will have the same laws.

Which Areas Will Affect Construction Businesses?

Real Estate

New residential property sales will be exempt from VAT. However, the first sale within 3 years of the building’s completion is zero-rated for VAT, which allows developers to recover the VAT on the goods and services used in the construction of new residential properties. However, if you buy a residential property and refurbish it, expect to pay VAT on the materials and services used but the sale itself will be VAT exempt.

In contrast, commercial properties – whether sold or leased – will be subject to VAT. Any building plots that are bought as bare land will be exempt from VAT.

Vehicles and Equipment

If you purchase vehicles, phones, computers or other electronics for staff to use as part of their role, they will now include VAT on the purchase price.

Insurance and Financial

Any insurance that is not life insurance will be subject to VAT, so expect insurance premiums to rise to account for this. If your company uses any financial services that are fee based (for example, accountancy services), then these will also have VAT added. Financial services that are margin based will be exempt.

Importing Goods

If you are buying any materials from abroad, VAT will be payable using a reverse charging system.

Overall Impact

When building up your quotations, you’ll now need to increase them to allow for the VAT charges. It’s also worth thinking about what additional measures will be needed to track your input and output VAT.

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Richard Poulter
Recruitment Director, Hong Kong
I am responsible for the recruitment business in Hong Kong, Asia, and the Middle East. I was a civil engineer and project manager for 15 years before becoming a construction industry recruiter in 2004. I am based in the Hong Kong office and excel at placing professionals in engineering, project management, planning and HSEQ/risk.
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Email: richard@maximrecruitment.com