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HMRC internal manual

VAT Time of supply

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HM Revenue & Customs
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Tax points for specific types of supply: construction: retention payments

Building contracts frequently include retention clauses. This will allow the customer to hold back a proportion of the contract price once the work has been completed, pending confirmation that the supplier has done the work properly and has rectified any immediate faults that might be found. This is sometimes referred to as snagging.

Provision for a retention payment in what would otherwise be a single payment construction contract, does not alter the basic nature of the contract for VAT time of supply purposes. In other words, it does not convert the supply into one that is covered by regulation 93 of the VAT Regulations 1995 (see VATTOS2370). In these circumstances the normal time of supply rules continue to apply to the main part of the supply. The retention element itself will be subject to the special rules for retention payments that are described at VATTOS5170.

These special rules do not apply to retention payments for supplies of construction services covered by regulation 93. As a result regulation 93(1)(c) also applies to any retention payments. Consequently, in cases where regulation 93(2) applies to funded supplies (see VATTOS9110), VAT is also required to be accounted for on any unpaid retentions on completion of the supply.