Value-added tax is often applicable to a set of business supplies that can either be a service, material, or product. In GCC, the property is also considered a taxable supply for which the property owners have to pay VAT. There is a certain vendor who is working with non-taxable supplies that are exempt from VAT. Thus VAT serves as an additional cost to those dealing with taxable business activities.
Transactions related to residential property development are treated differently under VAT rules as compared to commercial property transactions. VAT on residential property can be burdensome more often than not because of the pricing.
This article aims to throw light on the property development nuances under the VAT rules in Gulf countries.
Five areas of property development impacted by VAT in Gulf countries
In the residential property sector, there are some categories exempt from VAT—for instance, leasing or secondhand property transactions. The policy options are quite complex, and businesses need to understand these in order to rid themselves of broad challenges.
Following are the top areas of concern for the property development sector businesses in light of VAT regulations in GCC:
1. Cash flow
Cash flow is among the top concerns of any business regardless of the field. In the property development sector, sometimes, the profit margins are quite thin. In the meantime, cash flows can get more troubling to manage with VAT. In this scenario, the best way forward is to seek professional help from financial advisors as well as the best VAT consultancy in Dubai to manage cash flows under pressure.
The consultants and experts will help your business in getting a comprehensive picture based on a detailed assessment of cash flows. You can thus manage cash flows and make informed decisions pertaining to the matter.
2. Lease incentives
Property developers in the office, industrial and retail sector make offers of rent-free periods as an incentive to the prospective clients. When there are lease incentives that have been supplied for building work inducement, VAT liability is triggered often.
Rent-free periods come with complexity for property development professionals because some jurisdictions require you to present the market value equivalent of the rent you have offered you a tenant for free.
3. Barter transactions
In property transactions, there are trade-offs that do not involve monetary payment or benefits. These additional transactions are almost the need of the industry and are the reason behind the complexity of the VAT process in the Property development sector.
Sometimes these transactions occur in the form of exchanges where both parties give up their right of a monetary requirement and actually incentivize each other. Quantification of these non-cash transactions is difficult to deal with when calculating VAT.
4. Construction work
Construction services, for instance, material and equipment are among the taxable supplies under VAT. In this scenario, even the sub-contractors bear the brunt. Since the sub-contractors usually are not falling on the threshold for becoming VAT registered, they will have to pay the cost, and it will not be recoverable.
These problems may cause the project owners to make changes in the original contract and put the acquisitions under the domain of the contractor’s responsibility. In this way, when all taxable costs add up, the main contractor will be a registrant under VAT, and the costs will be recoverable.
5. Mixed-use property
Some real estate companies deal with exempt as well as taxable supplies. Such construction entities are often referred to as Mixed-use property units. The calculation of VAT payments and recovery can be very tricky for these property units because you have to calculate proportionate credit for every consecutive accounting period.
In case of any lapse in calculations, your business can face severe consequences in the shape of VAT penalties. Saving yourself from VAT penalties requires you to seek the professional services of a VAT consultant. Otherwise, you will have to deal with VAT as an additional cost and may affect the competitiveness of your business.
Want to know VAT property development implications:
In countries like the UAE, VAT is a relatively new regulation on business supplies like goods and services. Like all business sectors, the property development industry has numerous supplies taxable under VAT regulations in GCC. If you want to manage your property, business cash flows well while complying with VAT regulation seek professional services from a reputable consultancy.
Supplies in the property and real estate industry are complex to understand under VAT. While there are many supplies exempt, you have to vigilant to either keep your business completely VAT exempt or stay informed on the business components dealing with non-exempt activities. Inaccurate calculation of VAT can put your business at risk; you may affect the image of your business. On the other hand, VAT compliance helps you earn high credibility for your business, and thus earns you more clients.