VAT in Construction and Progress Claims
Value-added tax at 15% applies to contracting works, and needs compliant electronic invoicing, correct timing of the tax point, and a sound link to progress claims, the advance payment and retention.
Where the tax sits in a contractor’s cycle
A registered contractor charges tax on its outputs — the progress claims and invoices issued to the client — deducts the tax on its inputs — suppliers’ and subcontractors’ invoices — and remits the difference to the Zakat, Tax and Customs Authority in its periodic return. Discipline in archiving purchase invoices is what actually protects your right to deduct.
The claim and the invoice
What is particular to contracting is that revenue arises through periodic claims rather than a single sale, so the timing of the tax invoice must match the statutory rules on the time of supply and the tax point. Confusing the date a claim is submitted, the date it is approved and the date it is paid is the source of most of the sector’s return errors.
The advance payment and retention
The advance and the retention need correct treatment so that tax is neither charged twice nor missed: the advance is dealt with when received and its recovery reflected in the claims, while retention is part of the value of work executed even though its collection is deferred. Settle these treatments with your accountant once, then make them a fixed template.
Electronic invoicing
Electronic invoicing in the Kingdom runs in two phases: issuing and storing invoices electronically, then integration with the Authority’s system in waves whose dates taxpayers are notified of. Confirm your establishment’s status and its phase requirements with your accountant rather than assuming, because the requirements are updated over time.
Worked example
A progress claim with a work value of SAR 800,000 and 10% retention: the tax is calculated on the SAR 800,000 of work executed, giving SAR 120,000, while the cash paid out is SAR 720,000 plus tax. Anyone calculating the tax on the cash alone creates a difference that accumulates with every claim until it surfaces all at once at audit.
FAQ
Is tax charged on delay damages?
The treatment depends on the nature of the amount and how it is drafted in the contract, and it is one of those points best settled with a tax accountant once and recorded in an internal policy.
What if the client is a government entity?
The works are taxable under the general rules; the practical difference is in the payment mechanism and the documents required. Read the invoicing requirements in the tender conditions before you bid.
Can I deduct input tax on a project not yet handed over?
The right to deduct depends on having valid input invoices used in a taxable activity, not on handing the project over. What matters is that the invoice conditions are met and it is properly archived.
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