When output VAT is due on retention money
When a South African contractor accounts for output VAT on retention its client holds back, and why the timing of the retention invoice matters.
By Achekam · · 5 min read · For Construction businesses in South Africa
A contractor submits a progress claim, the client's quantity surveyor certifies it, and the client pays the certificate less the retention the contract allows. The retention will come months later, perhaps after the defects period. The question the bookkeeper faces at the next VAT period is simple to ask and easy to get wrong: has the VAT on that retained money already fallen due, even though the cash has not arrived?
For a VAT vendor in South Africa, the answer depends on paperwork the contractor controls: chiefly, when the retention is invoiced. Get the timing wrong and the business pays SARS output VAT out of its own pocket, sometimes long before the client releases the money.
SARS's rule: the earliest of three events
SARS's VAT 409 guide for fixed property and construction (Issue 7, up to date as at 5 October 2023) deals with retention directly. It says a building contractor only accounts for output tax on a retention amount at the earliest of:
- when an invoice is issued for it;
- when it becomes due for payment; or
- when it is recovered from the client.
The guide sets out this rule alongside its wider treatment of construction and property transactions, and SARS publishes it as the VAT 409 Guide for Fixed Property and Construction. Read the retention section with your contract open next to it, because the second trigger, "due for payment", is defined by your contract's release clause.
Why an early retention invoice brings the VAT forward
The first trigger is the one contractors set off by accident. Two ways of invoicing the same claim show the difference.
Invoicing the full value. The contractor invoices each progress claim for the whole value on the certificate, including the part the client will retain. That invoice now covers the retention. Under the VAT 409 rule, issuing it is the earliest event, so output VAT on the retention falls into the period of that invoice. The client, meanwhile, pays only the certificate less retention. The contractor has paid SARS VAT on money that may stay with the client until the end of the defects period.
Invoicing net, then invoicing retention on release. The contractor invoices each claim for the value on the certificate less retention, and raises a separate retention invoice when a portion of retention is released. No invoice has covered the retention until then, so, unless the retention became due or was recovered earlier, output VAT on it falls into the period when the retention invoice is issued, close to when the client pays.
The second approach keeps VAT and cash closer together. It also helps credit control, as invoicing so retention is not chased as overdue explains. Whichever approach you follow, discuss it with your accountant before you change, particularly on contracts already running.
The tax invoice still has to be right
Each progress invoice and each retention invoice is a tax invoice, and SARS's VAT 404 guide for vendors (Issue 15, up to date as at 17 December 2024) sets out when each kind is required:
| Consideration, including VAT | What the VAT 404 guide requires |
|---|---|
| More than R5 000 | A full tax invoice |
| Below R5 000 | An abridged tax invoice may be issued, except for zero-rated supplies |
| Less than R50 | No tax invoice is needed |
A progress claim or retention release above R5 000 therefore needs a full tax invoice. The same guide says that failing to issue tax invoices is a contravention of the VAT Act and an offence, and that without a proper tax invoice or approved alternative document a vendor cannot deduct input tax. Your client depends on your retention invoice to claim its own input tax, so a late or defective one becomes their problem too.
The payments basis changes the timing
A small number of contractors account for VAT on the payments (cash) basis. The VAT 404 guide says this basis is only available to vendors who are natural persons, or partnerships of natural persons, whose taxable supplies have not exceeded and are not likely to exceed R2,5 million in 12 months, and to certain public authorities, municipalities and associations not for gain. A vendor must apply to SARS in writing before using it. That limit comes from the guide's December 2024 issue, which predates the 2026 changes to the VAT registration thresholds, so check SARS's current position before relying on it.
A vendor on the payments basis must still issue a tax invoice within 21 days of making a taxable supply, but, according to the guide, only accounts for output tax to the extent payment has been received. For such a contractor, retained money does not carry output VAT until it is paid, whatever the invoice says. A contractor trading through a company is not among the natural-person vendors the guide lists.
How invoicing works in Achekam
In Achekam, a customer invoice starts as a draft you can change or delete. Issuing it takes the next number in the sequence and posts it to the ledger as debtors, sales and output VAT. That makes the moment of issue the moment output VAT enters the books, which is exactly why the retention invoice should be issued when you mean the VAT to fall due, not earlier.
A practical sequence for a job:
- prepare each progress invoice for the value on the certificate less retention, and issue it when the certificate arrives;
- keep the retention invoice as a draft, or do not create it yet, until the release date in the contract;
- issue the retention invoice on release, with each line's VAT set at 15%.
For a South African business, each invoice line's VAT is set to 15% or 0%, and the invoice screen does not tell zero-rated and exempt apart. Agree the rate for each kind of line with your accountant; VAT on invoice lines explains how line rates work.
Default terms are 30 days. If your contract gives the client a different period after release, change the terms on the retention invoice so the due date matches the contract.
Preparing the VAT201 from the books
Achekam does not prepare, store or submit a South African VAT201 return, and nothing is submitted to SARS eFiling. Your output VAT sits in the ledger, posted when each invoice was issued, and you or your accountant work out the return from it. Preparing your VAT201 from your books covers that step.
Before your next VAT period closes, list every open job, note whether its retention has already been invoiced, and agree with your accountant how each retention release will be invoiced from now on.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
