VAT on advance payments and deposits in the UAE: when the tax is due

UAE VAT is due on the date of supply. For most supplies of goods and services, the VAT Decree-Law sets that date as the earliest of a few events: the goods being transferred or the service completed, the receipt of payment, or the issue of a tax invoice. Whichever happens first fixes the tax period, to the extent of the payment or invoice.

So if a customer pays in advance, the date of supply for that amount is the date you receive it. VAT on the deposit belongs in the return for that period, not the period when the work is finished.

A Dubai fit-out company agrees a AED 400,000 plus VAT contract on 20 March. The client pays a 25% advance of AED 105,000 on 28 March, which is AED 100,000 plus AED 5,000 VAT. Work starts in May and finishes in July, with the balance invoiced on completion.

If the company's tax period ends on 31 March, the AED 5,000 VAT on the advance goes in the Q1 return, even though not one tile has been laid. The remaining AED 15,000 of VAT falls into the period of the completion invoice or the payments received, whichever comes first. The company should also issue a tax invoice for the advance within 14 days of receiving it.

Not every payment received in advance is consideration for a supply. A refundable security deposit, such as one held against damage to rented equipment and returned when the equipment comes back, is generally not payment for the supply while it remains refundable. If part is kept to cover damage or as a cancellation fee, the VAT position for that part needs to be considered at that point.

The contract wording matters. A 'booking deposit' that is deducted from the final price is normally an advance payment for the supply. A 'security deposit' that is returned in full is not. Read the terms before deciding.

Contracting, events and education businesses meet these variations every month.

• Milestone billing: each invoice or payment, whichever is first, sets the date of supply for that stage.
• Retentions held back by a main contractor: the timing depends on the contract and when the retention becomes payable; agree the treatment with your tax agent.
• Continuous supplies such as monthly retainers have their own rules based on invoices and payments.
• Cancelled orders where the deposit is refunded: issue a tax credit note and adjust the VAT.
• Non-refundable cancellation fees kept by you: consider whether they are consideration for a supply.

Advance payments are easy to miss because there is often no invoice yet. The money just appears on the bank statement. If the bookkeeper posts it to an unidentified receipts account, the VAT never reaches the return.

In HelloBooks, the AI looks at each customer receipt on your uploaded statement. When a payment arrives from a customer with no open invoice, or more than the open balance, it treats it as a possible advance and asks whether to raise an advance tax invoice. Once you confirm, the VAT is recorded in the right period and the advance is later applied against the final invoice. Your accountant sees all advances on one report before the VAT 201 draft is approved.