Tax Risks in Phased Billing and Milestone Payments for Construction Projects in Bahrain
In Bahrain’s construction industry, projects are rarely paid in a lump sum. Instead, contracts are structured around phased billing and milestone payments tied to project progress. While this system supports cash flow management, it also creates complex Value Added Tax (VAT) obligations.
Errors in VAT treatment for milestone payments are among the most common causes of disputes with the National Bureau for Revenue (NBR). For developers and contractors, understanding these risks is essential. With the guidance of an experienced lawyer in Bahrain, companies can structure phased billing correctly, ensuring compliance while protecting profitability.
Learn more about what our expert Advocates say about Tax Law services in Bahrain.
How Phased Billing Works
Construction contracts in Bahrain typically divide payments into milestones, such as:
- Completion of excavation and foundation works.
- Structural completion.
- MEP installation.
- Finishing and handover.
Each milestone triggers an invoice, which must include VAT at 10%, unless exempt.
Tax Risks in Milestone Payments
1. Incorrect Timing of VAT Liability
- VAT is due at the time of invoicing or receipt of payment, whichever comes first.
- Some contractors incorrectly defer VAT until project completion, exposing themselves to reassessments.
2. Retention Payments Misapplied
- Retention amounts are often excluded from VAT reporting until release, which is non-compliant.
3. Misclassification of Supplies
- Confusion over whether milestone payments cover taxable works, exempt residential property, or mixed-use developments.
4. Variation Orders Not Separated
- Variation works added mid-project must be invoiced separately with VAT applied. Failure to separate creates compliance risks.
5. Disputes with Developers
- Developers may challenge whether milestone invoices are VAT-inclusive or exclusive if contracts lack clarity.
Legal and Financial Consequences
- NBR Reassessments – Failure to apply VAT correctly may result in backdated liabilities.
- Penalties and Fines – Late or inaccurate reporting attracts heavy financial penalties.
- Civil Disputes – Developers and contractors may enter litigation over unclear tax obligations.
- Criminal Liability – Deliberate misreporting can escalate into tax evasion allegations.
- Cash Flow Strain – Unexpected VAT liabilities can disrupt project financing.
A skilled advocate in Bahrain can defend contractors and developers against these risks.
Tax Lawyers in Bahrain providing fiscal and compliance advice.
How to Avoid VAT Risks in Phased Billing
1. Draft Clear VAT Clauses in Contracts
Contracts should specify whether milestone payments are VAT-inclusive or exclusive, and how VAT applies to retention and variation orders. A law firm in Bahrain can draft protective clauses.
2. Issue VAT-Compliant Invoices
Every milestone invoice must include VAT registration details, invoice numbers, and proper breakdowns.
3. Separate Variation Orders
Avoid combining variations and milestones in a single invoice. Separate invoicing ensures compliance.
4. Maintain Transparent Documentation
Keep accurate records of invoices, contracts, and payments to defend against NBR audits.
5. Conduct Pre-Audit Reviews
Engage legal and tax advisors to review phased billing practices regularly.
Practical Example
A contractor issues a milestone invoice for structural completion worth BHD 500,000.
- Correct approach: Apply 10% VAT (BHD 50,000) at invoicing, regardless of whether payment is delayed.
- Incorrect approach: Defer VAT reporting until final handover, which would trigger reassessment and penalties.
Role of Legal Services in Phased Billing Compliance
Professional legal services in Bahrain help construction companies by:
- Drafting and reviewing contracts with VAT-compliant clauses.
- Advising on invoicing for milestone payments and retentions.
- Acting as advocates in Bahrain in disputes with developers or the NBR.
- Representing companies in audits, reassessments, and appeals.
- Training finance teams to handle phased billing correctly.
By working with a trusted law firm in Bahrain, companies can reduce tax risks and maintain smooth project delivery.
In Bahrain’s construction and real estate markets, phased billing and milestone payments create significant VAT risks. Missteps in invoicing, documentation, or classification can lead to reassessments, penalties, and disputes with both the NBR and project owners.
The safest strategy is prevention: clear contracts, compliant invoices, and proactive legal oversight. By engaging an experienced lawyer in Bahrain and professional legal services in Bahrain, contractors and developers can manage tax risks effectively, protect cash flow, and maintain investor trust.
At Manal Dhahi Legal Consultants, Attorney & Private Notary, our skilled advocates in Bahrain specialize in VAT compliance and dispute resolution. We help contractors and developers structure phased billing correctly and defend against tax disputes.
