Retention before VAT refers to an arrangement, commonly found in construction or service contracts, where the customer withholds a portion of the payment
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as a form of security to ensure that the contractor or supplier fulfills their obligations. The VAT treatment of retention can follow different approaches—either before or after VAT is applied—depending on the terms of the contract. This manual outlines the procedure for recording retention amounts where VAT is deferred i.e. retention is before VAT calculations.
The retention is calculated on the net amount (before VAT).
VAT is applied only to the amount paid or invoiced, not including the retention.
The retained amount is usually paid at a later date , once the agreed conditions are met (e.g., project completion or after a defect liability period).
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- Set Transaction Type to Other.
- In the Payment Details tab, select G/L account as Current Trade Payables, choose the Supplier, and enter the exact VAT amount.
e) Reversal of Retention
When the retention needs to be reversed, the VAT on that retention must be calculated using the same method as in steps b, c, and d.
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