Under UAE VAT law, retention on a construction invoice becomes taxable at the earliest of three dates: the issue of a tax invoice, the receipt of payment, or the date the supply is treated as completed — 12 months after the goods or services were first made available. This comes from Article 26 of Federal Decree-Law No. 8 of 2017 on VAT. In practice, a contractor who bills AED 1,000,000 with 10% retained invoices the full amount and charges VAT on the full amount if a tax invoice is issued; retention withheld by the employer does not remove VAT from the portion withheld. This guide, last reviewed on 29 September 2026, shows how the rule plays out and how the 12-month completion trigger can pull VAT forward even with no invoice or payment.
The earliest-date rule, in plain terms
Article 26 sets the date of supply for goods and services that are not treated as continuously supplied. VAT becomes due at the earliest of:
- The date a tax invoice is issued for the supply.
- The date payment is due as shown on the tax invoice, if issued within 14 days of the supply date.
- The date of receipt of payment.
- For goods: 12 months after the goods were made available to the customer. For services: 12 months after the services were first made available.
The full VAT decree text carries the wording; the executive regulations fill in the completion mechanics. Note the 14-day rule: if the tax invoice is issued within 14 days of the supply, the payment-due date on the invoice fixes the supply date.
Retention does not carve out VAT
A common mistake in construction contracting: the employer withholds 5–10% of each progress payment as retention, and the contractor assumes VAT applies only to what was actually received. It does not. If a tax invoice is raised for the full certified amount, VAT is chargeable on the full amount including the retained portion.
| Scenario | When VAT is due | VAT base |
|---|---|---|
| Progress invoice issued, 10% retention withheld | At invoice date | Full certified amount, incl. retention |
| No invoice, partial payment received | At receipt of payment | Amount received |
| No invoice, no payment, 12 months pass since work made available | At the 12-month mark | Full value of the supply |
| Retention released at practical completion | At invoice/payment date for that release | Released amount (if not already taxed) |
Worked example
A contractor certifies a progress application of AED 1,000,000. The employer holds AED 100,000 as retention and pays AED 900,000 plus VAT.
- If the contractor issues a tax invoice for AED 1,000,000, output VAT of AED 50,000 is due on the invoice date — including VAT of AED 5,000 attributable to the withheld retention — even though the cash has not arrived.
- If no tax invoice is issued and only AED 900,000 is received, VAT is due on AED 900,000 at receipt. The retained AED 100,000 is still not safe: if neither invoice nor payment happens, VAT falls due 12 months after the work was made available.
- When the retention is released, VAT is due then — unless it was already charged and remitted on the original invoice. Double-charging the released retention is the second most common error; the fix is a credit note against the original invoice if VAT was included twice.
What contractors should standardise
- Decide the invoicing position deliberately. Either invoice the full certified amount (charging VAT on retention) or invoice net of retention — but know that the 12-month rule still catches unpaid retention.
- Track retention in a VAT-visible ledger. Every retention balance should carry its original supply date, so the 12-month trigger can be monitored.
- Reconcile released retention against original invoices each period to avoid charging VAT twice.
- Check contracts' payment terms — terms exceeding 12 months push VAT earlier than cash flow suggests.
FAQs
Do I charge VAT on retention I haven't received? Yes, if you issue a tax invoice covering the certified amount — VAT is due on the invoice date for the full amount, retention included.
What happens to old retention with no invoice and no payment? The supply is treated as completed 12 months after the services were first made available, and VAT becomes due then under Article 26.
How do I avoid charging VAT twice on released retention? Reconcile released amounts against the original invoices. If VAT was already remitted on the original invoice, issue a credit note for the duplicate rather than billing VAT again.
Gautam Sanoj, Senior Tax Advisor at Finanshels, handles VAT positions for UAE construction and contracting businesses. If your retention ledger and VAT returns don't reconcile, book a consultation before the next filing window.
