Retention on a fit-out contract, from the first claim to the last release.
Most joinery and fit-out subcontracts in the UAE hold back part of every payment until the work has proved itself. This is how retention works, where its VAT goes, and how to keep track of it for the years it can take to come back.
7 minute read · Updated 20 October 2026 · Practical guidance, not tax advice: confirm anything that matters for your business with your tax agent or the Federal Tax Authority.
Retention is your money, held back on purpose.
On most UAE fit-out and joinery subcontracts, the main contractor keeps back a percentage of every certified payment, commonly 5% or 10%, as security against defects. It is not a discount and not a penalty: it is part of the contract price, paid late.
It usually comes back in stages written into the contract, for example part at practical completion and the rest at the end of the defects liability period. That can take months or years. When you invoice the release is decided by your contract, not by the tax rules.
- The contract sets the percentage, any cap, and the release stages.
- It comes off every claim, worked out on the value of the work certified.
- It is paid only when you invoice its release, once the contract's conditions are met.
| Claim | Work certified | Retention 10% |
|---|---|---|
| Claim 1 (30%) | 300,000.00 | 30,000.00 |
| Claim 2 (40%) | 400,000.00 | 40,000.00 |
| Claim 3 (30%) | 300,000.00 | 30,000.00 |
| Held at handover | 1,000,000.00 | 100,000.00 |
Its VAT follows the invoice's method, and is declared once.
Every invoice works one way: all deductions before VAT, or all deductions after VAT. Retention follows the same method as the advance and every other deduction on that invoice. Taking the advance off before VAT while leaving retention inside the VAT base is a mix, and a mix is wrong.
Before VAT: retention comes off before VAT is worked out, so the claim does not tax it. Its VAT is declared later, when you release it, on a tax invoice for the retention plus 5%.
After VAT: VAT is worked out on the whole claim first, so the retention's VAT is declared on the claim itself. Releasing it later carries no VAT.
| Line | Before VAT | After VAT |
|---|---|---|
| Work certified | 300,000.00 | 300,000.00 |
| VAT on the work certified | — | 15,000.00 |
| Less advance (30%) | −90,000.00 | −94,500.00 |
| Less retention (10%) | −30,000.00 | −31,500.00 |
| VAT on the net, before VAT | 9,000.00 | — |
| Payable | 189,000.00 | 189,000.00 |
After VAT, 4,500 of the 15,000 was already declared on the advance tax invoice, so this claim declares 10,500. Before VAT, it declares 9,000. Both payables are 189,000.
The release invoice is where the two methods part ways.
Before VAT: the release is a tax invoice for the retention plus VAT, 100,000 + 5,000 = 105,000, with the tax point on the release date. Its VAT goes in the return for the period you release it, however long after the claims that is.
After VAT: the release asks for the 105,000 that was held back, VAT included. That VAT was declared on the claims, so the release declares none.
Either way, a release made in parts rounds the VAT on each document. Three releases of 33,333.33, 33,333.33 and 33,333.34 carry 1,666.67 each, 5,000.01 in total: across a contract the VAT may differ from exactly 5% by rounding fils only.
| Line | Before VAT | After VAT |
|---|---|---|
| Retention released | 100,000.00 | 105,000.00 |
| VAT declared on the release | 5,000.00 | 0.00 |
| Payable | 105,000.00 | 105,000.00 |
Keep retention on its own account, contract by contract.
Retention you are owed belongs in a receivable account of its own, listed contract by contract with what is held and when each stage falls due. When every release has been invoiced, it is zero.
The usual failure is not the VAT. It is forgetting: a release that falls due two years after handover, with nobody left on the project to chase it.
- For each contract: retention held to date, release stages and their dates.
- Claims and release invoices linked to the same contract.
- A contract never bills past 100%: the advance, the claims and the releases together equal its value.
In Mizarah each claim takes off the retention under your company's method and posts it to the retention account; the release raises its own tax invoice (with VAT under the before-VAT method), and the contract refuses any claim that would bill past 100%.
Common questions.
- Does retention reduce the VAT on my claim?
- It depends on the invoice's method. Before VAT, yes: VAT is worked out after retention comes off, and the retention's VAT is declared when it is released. After VAT, no: VAT is worked out on the whole claim and nothing more is declared at release. Either way the VAT across the contract is 5% of its value, declared once.
- Can I take the advance off before VAT and the retention after?
- No. Every deduction on an invoice follows the same method: the advance, the retention, earlier claims, any discount and any custom deduction.
- When is the VAT on a released retention due?
- Before VAT, on the date of the release tax invoice, in that period's return. After VAT, it was already declared on the claims, so the release carries none.
- Is retention the same as a penalty or a backcharge?
- No. Retention is part of the price and will be paid. A penalty or backcharge reduces the contract value, so it reduces the taxable value under both methods and carries no VAT later.
Read next: VAT on progress claims: before or after deductions · The advance tax invoice · Joinery & fit-out
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