Proactive measures should be taken to help protect suppliers from cashflow issues as a result of the introduction of VAT (value-added tax) this year, warned a leading UAE-based construction industry expert.

“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,” stated Zander Muego, a partner at international project management and cost consultancy firm, Thomas & Adamson.

This is backed up by a recent study by credit insurer Coface which found construction-related companies across the UAE last year delayed payments by an average of 123 days longer than the contracted payment schedule, he added.

Muego pointed out that the issue surrounding cashflow will arise as VAT falls due when the supplier raises an invoice, irrespective of the payment date of that invoice.

"With the VAT then being accounted for by the supplier in the VAT return period in which the invoice falls, payment will be required whether or not they have been paid," he stated.

“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," he added.

"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," explained Muego.

"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," he added.

As a tried-and-tested way to avoid this situation, Muego proposed the systems in place in other countries such as the UK where the mechanism has proved effective at avoiding this potentially crippling problem.

"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," he stated.
 
"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," he explained.

According to him, the industry needs everyone involved to make more effort to honour agreed payment terms, with support from a robust legal process to ensure agreed terms can be enforced.

"As it stands, while everyone will be impacted, the impact on small to medium sized entities within the construction industry could be fatal," warned Muego.

"There is a significant risk that added cashflow pressures will push some businesses that are already struggling, over the edge," he added.-TradeArabia News Service