Retention money in construction: the accounting and the VAT date of supply

What retention actually is

A construction contract typically lets the employer hold back 5–10% of each certified payment until practical completion or the end of the defects period. The contractor has done the work — the revenue is earned under IFRS 15 — but has no unconditional right to the cash until the conditions clear. That gap drives both treatments below.

The accounting: contract asset, not trade receivable

Certified work you can invoice now is a receivable. Retention is a contract asset: earned consideration whose right to payment is still conditional on something other than the passage of time. Reclassify it to receivables only when the conditions clear (completion certificate, defects period end). The distinction is not cosmetic — receivables age and drive ECL provisioning on one pattern; retentions on a project running three more years age on another, and lumping them together makes both the ageing report and the provision wrong.

The VAT: the tax point usually waits

For continuous supplies with periodic certification, the date of supply is generally the earliest of: the tax invoice being issued, the payment falling due, or the payment being received. Retention, by design, is neither invoiced nor due at certification — so its tax point normally arrives when the retention is finally invoiced or received, not when the original work was certified.

The practical consequences: don't account for output VAT on retention years before you can bill it — that is prepaying tax on cash you don't hold; and when the retention does release, remember it carries VAT at that point — releasing AED 500,000 of retention means invoicing AED 525,000, a step contractors' cash-flow forecasts routinely miss.

The traps

• Invoicing the full certified amount including retention — that accelerates the entire VAT and defeats the deferral
• Forgetting retentions in the ECL assessment — long-dated, condition-heavy balances deserve their own loss-rate thinking
• Losing track of defects-period end dates, so releasable retention sits unbilled for months
• Contract clauses that make retention 'due' on certification with only payment delayed — wording can move the tax point; read yours

How Orbit applies this

Orbit carries retention per contract as a contract asset with its release conditions and dates, keeps it out of the VAT return until the tax point actually arrives, raises the invoice (VAT included) when release conditions clear, and ages it separately in the ECL working.