VAT for Construction Companies in the UAE: Progress Billing, Retention and Subcontractors (2026)

For a contractor, the rate is the easy part. Almost every construction service in the UAE is standard-rated at 5%. What causes the real problems is timing. Projects run for years, payments arrive in stages, a slice is held back as retention, and invoices are issued against certificates rather than finished work. Each of those creates its own VAT tax point, and getting them wrong means paying VAT too early, too late or not at all.

This guide is written for main contractors, subcontractors, MEP and fit-out firms, and the finance teams that run their billing. It covers the VAT rate on construction, the timing rules for each type of payment, retention, variations, and how the October 2026 changes on cash payments and supplier checks hit the sector harder than most. It also covers how corporate tax treats long-term contracts.

Quick answer: construction services are standard-rated at 5% in the UAE, including work on residential buildings. VAT is due at the earliest of the invoice date, the payment date or the date payment is due under the contract. Retention is taxed when it is invoiced, received or falls due, not when the work is done, so how you word your progress invoices decides when you pay.

What rate applies to construction work?

Construction, design, engineering, project management, fit-out and maintenance services are all standard-rated at 5%. That is true even when the building is residential. Contractors often assume that because a new residential unit is zero-rated when the developer sells it, their own work on the building should be zero-rated too. It isn't. The contractor charges 5% to the developer, and the developer recovers it because their own first sale of the unit is zero-rated.

When is VAT due? The tax point on staged payments

Construction contracts are treated as continuous or staged supplies. For these, the date of supply is the earliest of three events:

1. the date a tax invoice is issued,

2. the date payment is received, or

3. the date payment is due under the contract or a payment certificate.

If none of these happens for 12 months, VAT becomes due on the work done to that point anyway. That rule stops long-running jobs from building up years of untaxed work.

In practice, this means VAT follows paperwork and money, not physical progress on site. If your consultant certifies a progress claim on 25 March and the contract says payment is due 30 days after certification, VAT is due in the period that contains 24 April at the latest, even if the client hasn't paid and you haven't invoiced.

Advance and mobilisation payments

An advance payment is taxable when it is received, even if no work has started. Issue a tax invoice within 14 days of receiving the money. When later progress bills recover the advance, VAT should only be charged on the net amount, so the advance isn't taxed twice.

Example: You receive a 10% mobilisation advance of AED 500,000 plus AED 25,000 VAT on a AED 5,000,000 contract. Each later progress bill deducts 10% to recover the advance. On a certified progress value of AED 1,000,000, you bill AED 900,000 net of the advance recovery, and charge VAT of AED 45,000 on that net amount. Across the project, total VAT charged still equals 5% of AED 5,000,000.

Retention: the most common VAT error in construction

Clients usually hold back 5% to 10% of each progress payment as retention, released at completion or at the end of the defects liability period. The VAT question is whether you pay VAT on the retained part now or when it is released.

The answer depends on what your invoice says and what the contract says:

• If your tax invoice shows the gross certified value and simply notes that retention will be deducted from payment, you have invoiced the full amount. VAT on the retention is due now.

• If your tax invoice bills only the amount currently payable (certified value less retention), and the retention is not yet due under the contract, VAT on the retention is deferred until it is invoiced, paid or falls due.

Example: A progress certificate values work at AED 1,000,000 with 10% retention. If you invoice AED 1,000,000 plus AED 50,000 VAT, you owe the full AED 50,000 in this VAT return, even though you will only receive AED 900,000 plus VAT for now. If you instead invoice AED 900,000 plus AED 45,000 VAT and bill the AED 100,000 retention separately on release, you pay AED 45,000 now and AED 5,000 when the retention falls due.

For a contractor running AED 50 million of work a year with 10% retention, the difference is AED 250,000 of VAT paid one to two years early. Agree a billing format with your clients and their consultants at the start of the project, because changing it mid-contract is hard. Under e-invoicing, retention will need to be shown consistently in your structured invoice data too.

Variations, claims and damages

Variation orders are additional consideration for the same construction supply, so they carry 5% and are taxed when invoiced, paid or due under the variation. Unapproved variations that haven't been invoiced or certified don't yet create a tax point.

Liquidated damages deducted by a client for late completion are generally treated as compensation rather than payment for a supply, so they usually sit outside the scope of VAT. That doesn't mean you can simply reduce the VAT on your invoice. Bill the full contract value with VAT, and let the client deduct the damages from payment, unless your contract clearly treats the reduction as a price adjustment, in which case a tax credit note is the right document.

Back-charges from a main contractor to a subcontractor, for example for materials or labour supplied, are separate taxable supplies and should be invoiced with VAT.

Subcontractors and the October 2026 rules

Construction is the sector most exposed to the two VAT changes that took effect on 1 October 2026.

Cash payments. Cabinet Decision No. 149 of 2026 lets the FTA block input VAT recovery on supplies above a value threshold, still to be set by Ministerial Decision, when payment is made or intended to be made in cash. Paying labour suppliers, small subcontractors or site purchases in cash is now a direct risk to your VAT recovery. Our guide to the new cash payment rules explains the detail.

Supplier verification. Under FTA Decision No. 13 of 2026, you must verify a supplier's identity, place of business and licensed activities before claiming input VAT on what they supply. Full checks apply once you pay a supplier AED 100,000 in 12 months, and enhanced checks, including written confirmation of their UAE bank account, apply above AED 375,000. A main contractor will cross both thresholds with most of its subcontractors. Read our supplier verification guide and start a file for each one.

One more check: confirm that each subcontractor's trade licence actually covers the work they invoice you for. A joinery firm invoicing for MEP works is exactly the mismatch the FTA's new rules are designed to catch.

Input VAT: what contractors can and can't recover

Because construction services are taxable, contractors can generally recover input VAT on materials, plant hire, subcontractors, site offices and professional fees. The exceptions are the standard blocked input VAT categories:

• Staff entertainment and hospitality, including site celebrations

• Vehicles available for personal use (pickups used only on site are usually recoverable, while saloon cars given to managers often aren't)

• Employee benefits provided for staff's personal use, unless required by law or the employment contract

Labour accommodation is a trap. Renting accommodation in an ordinary residential building is exempt, so there is no VAT to recover. Accommodation in a labour camp operated commercially is standard-rated, and VAT on it is recoverable where providing accommodation is a legal requirement for your workers.

Imported materials and equipment carry 5% import VAT. VAT-registered importers account for it through the reverse charge in their return, rather than paying cash at customs, provided the customs registration is linked to the TRN. Check that the import declarations match what appears in Box 6 of your VAT return.

Corporate tax for construction companies

Revenue on long-term contracts

Corporate tax starts from your accounting profit under IFRS. Most construction contracts recognise revenue over time, based on the percentage of completion, not on billing. That means taxable profit can differ significantly from cash received. A contractor can owe corporate tax on profit from work that has been certified but not yet paid, including retention receivables.

Loss-making contracts are usually provided for in full in the accounts as soon as the loss is foreseen. Those provisions are generally deductible when they are made in accordance with accounting standards, but they must be well supported, because the FTA will look closely at large provisions.

Related-party subcontractors

Many contracting groups use related companies for labour supply, equipment hire or MEP works. Those transactions must be priced at arm's length under the transfer pricing rules, and if they exceed the disclosure thresholds they must be reported with the corporate tax return. Charging a related labour supplier at cost while the main contractor keeps the margin is a classic issue.

Interest and equipment finance

Net interest on plant finance and working capital facilities is deductible up to 30% of tax-adjusted EBITDA, with a safe harbour for the first AED 12,000,000 of net interest. Smaller contractors will rarely hit the limit, but those with heavy equipment fleets should check it.

Our corporate tax calculator gives you a quick estimate, and our team can prepare your corporate tax return.

A VAT checklist for contractors

• Agree a progress billing format that bills retention separately on release

• Map each payment certificate to its due date and the VAT period it falls in

• Issue tax invoices within 14 days of each tax point

• Track advance recoveries so VAT isn't charged twice

• Stop paying subcontractors and labour suppliers in cash

• Build a verification file for every subcontractor paid over AED 100,000 a year

• Review blocked input VAT, especially staff vehicles and accommodation

• Reconcile import VAT on customs declarations to your VAT return each quarter

• Plan for e-invoicing, which applies to all B2B progress bills from 1 July 2027 at the latest

Frequently asked questions

Is VAT charged on construction of a residential building?

Yes. Construction services are standard-rated at 5% for both residential and commercial projects. The developer recovers that VAT because its own first sale of the residential units is zero-rated.

When do I pay VAT on retention?

When the retention is invoiced, paid or falls due under the contract, whichever comes first. If your progress invoice already includes the retained amount, VAT on it is due straight away.

Do I charge VAT on a mobilisation advance?

Yes. VAT is due when the advance is received, and a tax invoice must be issued within 14 days.

Are liquidated damages subject to VAT?

Usually not, because genuine compensation for late completion isn't payment for a supply. The way your contract treats the deduction matters, so check before adjusting any invoice.

Can I recover VAT on labour accommodation?

Not if it is rented in an ordinary residential building, because that rent is exempt. VAT on commercially operated labour accommodation can be recoverable where providing housing is legally required.

Keeping your projects VAT-compliant

Construction VAT errors tend to build up quietly over long projects and only surface at an audit or a client's year-end review. If your billing format, retention treatment or subcontractor files haven't been looked at since VAT started, now is the time. Our VAT and corporate tax team works with contractors on billing reviews, VAT return filing and project accounting. Book a free consultation to talk it through.

More sector guides: VAT for real estate, VAT for trading companies, VAT for logistics.

This article is general information based on UAE VAT and corporate tax legislation as of October 2026, including Federal Decree-Law No. 8 of 2017 as amended, Cabinet Decision No. 149 of 2026 and FTA Decision No. 13 of 2026. It is not tax advice. Check your specific contracts with the Federal Tax Authority or a qualified adviser.