VAT in Construction

In construction, VAT is dealt with on every invoice, every progress claim and every supplier payment, yet it is one of the biggest reasons contractors run into cashflow pressures. Simply put, VAT never belongs to you. It belongs to the South African Revenue Service (SARS).

Construction work comes with progress claims and retention. VAT is generally triggered when a tax invoice is issued, not when payment is received. This is where many construction companies miscalculate and end up with large VAT debt owed to SARS.

VAT Accounting Bases

There are two accounting bases for the calculating of VAT. The basis that your construction company uses, can make a big difference to your cashflow.

1. Invoice Basis: VAT is accounted for on the earlier of when you issue an invoice or when payment is received.

   If you issue a progress claim today, you must declare and pay the VAT even if the client only pays you 90 days later. This may mean that you would need to pay SARS before you have been paid by the client.

2. Payment basis: Vat is accounted for when payment is received. However, there are certain qualifying criteria for this method. Generally, businesses with taxable supplies below R2.5 million per year may apply to use this basis.

If you issue a progress claim today under this basis, you must declare and pay the VAT only when the payment is received, even if the client only pays you 90 days later. This significantly eases pressure on your cash flow.

Practical Tips

1. Know your VAT registration basis and how it affects your cashflow.
2. Keep VAT in a separate account, do not spend it.
3. Reconcile your VAT monthly, not just at submission time.
4. Follow up on overdue payments immediately.

VAT in construction is more than just compliance; it is cashflow. Stay on top of it, keep it clear and accurate and avoid unnecessary cashflow stress.

Reetesh Balgobind | Head: Finance

References:

South African Revenue Service (2024) Obligations of a VAT vendor. Available at: https://www.sars.gov.za/types-of-tax/value-added-tax/obligations-of-a-vat-vendor/ (Accessed: 21 February 2026).