Thomas & Adamson cautions of VAT cashflow issues if measures not taken
Zander Muego, partner, at project management and cost consultancy firm Thomas & Adamson has warned that proactive measures should be taken to protect suppliers from cashflow issues due to the introduction of VAT across the GCC.
His statement follows a recent study by credit insurer Coface, which found that some construction firms delayed payments by an average of 123-days longer than the contracted payment schedule.
“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,” explains Muego.
He says that problems can arise when VAT is due once a supplier has raised a VAT invoice irrespective of the actual payment date of the invoice.
“Since a company will issue a VAT invoice before it receives payment from the customer, VAT will need to be accounted for in the VAT return that covers the time at which the invoice was issued. Currently in the UAE, 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’, which is 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 shortfall has been suffered – such as job losses or harm to reputation,” says Muego.
He points out that systems that have been tested in other countries can be relied upon to avoid these potential issues. “The UK’s HM Revenue & Customs ‘Cash Accounting Scheme’ works well to deal with this situation where it is common for construction 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 consequence, but allows the customer to see the VAT amount due. 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,” explains Muego.
