Is VAT charged at 5% on construction services in the UAE?
Yes. Section 12.1 of the FTA's real estate VAT guide states that construction services supplied in the UAE are subject to VAT at 5%, whatever type of building is being constructed. A contractor building a villa, a school or a warehouse charges the same 5% on its services, even where the developer's later sale is zero-rated or exempt.
Why the building type does not change the contractor's VAT
Zero-rating and exemption apply to the supply of the building itself, by sale or lease. The contractor supplies construction services to the developer, which is a different supply. A developer making a zero-rated first sale of a residential building can usually recover the 5% it paid the contractor, because its costs relate to a zero-rated supply.
When the 5% becomes due
Contracts with advance payments, stage payments or retention fall under the continuous-supply rule in Article 26 of the VAT Decree-Law. VAT is due at the earliest of the tax invoice, the payment due date shown on it, or payment, with a 12-month backstop.
How SupaJack Construct charges it
Progress invoices are raised from approved payment certificates and carry 5% VAT on the certified value less advance recovery. How VAT applies to retention is a contract setting that locks once the first invoice posts under it, so one contract cannot be billed two different ways.
Related tools and guides
See the VAT guide for contractors, the VAT calculator, the payment certificate calculator, the retention calculator, finance and VAT in SupaJack Construct, the answer on whether a payment certificate triggers VAT and the meaning of e-invoicing.
Worked example
A contractor builds a residential tower for a developer and certifies AED 2,000,000 of work in March. It charges AED 100,000 VAT. When the developer sells the first apartments within three years of completion, those sales are zero-rated, and the developer can recover the AED 100,000 through its return.
Questions people ask
Is VAT on construction of a villa zero-rated?
No. The construction services are 5%. Zero-rating applies to the first supply of the completed residential building.
Does the subcontractor charge VAT to the main contractor?
Yes, at 5% if registered.
Is a payment certificate the VAT trigger?
No. Certification alone does not trigger the date of supply.