Business Impact Analysis – Freelancers under VAT in the UAE
The dawn of internet and computer-run world has opened many doors to many people, making life easier. The advent of freelancing gave people the freedom of working at the comfort of their homes, or wherever they are, without necessarily having to commute to a workplace. This has been quite helpful to them as the hustle and tussle of going to work daily is scraped off and one only works within their own preferred times.
In many countries around the world, this business is not regulated by the government hence is not taxed. The case in the UAE is different, following a recent taxation policy from the government. In a bid to regulate the business, there was an implementation of value-added tax (VAT) on freelancers. So what implications does this new policy have on the business? What are some of the adjustments freelancers ought to undertake? These and other questions will be answered in this post.
Which freelancers are subjected to paying VAT?
Ever since the introduction of VAT in the UAE, most companies and businesses were quick to adapt and adjust accordingly. Freelancers and other self-employed individuals were, however, caught aback on what is expected of them and how they are going to be charged. For freelancers, their taxation is divided into three categories. This all depends on your revenue, which must also be backed up by records. A freelancer who has earned less than AED 187,500 cannot register and is not liable to pay for VAT. Those who earn between AED 187,500 and AED 375,000 may choose to register or not. It is wholly optional for them. However, those individuals who earn more than AED 375,000 must register for VAT. In a nutshell, for you to be liable for paying VAT, your revenue for the year should be above AED 187,500.
[Source: The National]
Why should freelancers register for VAT?
While it came as a surprise to many, not everyone really supported the idea of having a value-added tax enforced on freelancers. However, the new regulations have actually come with a number of benefits for the individual freelancers.
- Increased freelancer – client trust
One of the major hindrances to creating a good relationship between clients and freelancers is trust. No one really trusts the other. When a freelancer is VAT compliant, this will make the client trust them and be more willing to conduct more businesses with them. This method is also used to eliminate scammers who are found all over on the internet, in the name of freelancers, yet their main work is to con unsuspecting clients. Getting to tax freelancers will also protect legitimate freelancers from those scammers.
- Ability to levy taxes
A TRN number which you receive after registering for VAT makes it possible for you to levy the tax on your work. The tax, which is levied from your clients, is directly paid to the government. Another good thing is that you only pay taxes on the profits you made or in other words, added value.
What does this mean for freelancers?
Freelancing is gaining track as time goes by and governments all over the world are trying to regulate the business through taxations. This, as experienced in the case of UAE, has really changed how freelancers now conduct their business. Right now, there is increased VAT compliance by the individuals who have to follow some processes in order to remain in business. Unlike in other countries, freelancers from the UAE are now encouraged to properly create and manage their financial records for the purpose of taxing.
After a freelancing business has been registered with the government, the individual is given a TRN number which they ought to mention on every invoice. For transparency purposes, the freelancers from the UAE are now required by law to provide the VAT invoices to their clients.
These invoices should have their serial numbers and be in their sequence, mention the TRN number, and must have the total service cost and the VAT stated separately.
Steps for VAT registration
The process of obtaining a VAT compliance license is an easy one in the UAE. Just follow these simple steps;
1.Confirm whether you are eligible for VAT or not
As indicated earlier, freelancers are divided into three categories for the purposes of taxation. Check which bracket you fall into as per your income, whether you are eligible for a VAT or not. If yes, proceed to the next steps.
2. Obtain a license
If the freelancer is not licensed to operate in the country, they should obtain a license with the permission of their employer. There are several free zones which offer freelancer licenses. The fees, modalities and the types of activities may differ from one place to another.
3. Register online
After getting a license, the freelancers can now register for VAT on the FTA portal. To start the process of VAT registration on the FTA website, you would need the following;
- Details of the trade license
- Revenue for the last 12 months
- The anticipated revenue
- Financial activity
- MOA (Memorandum of Association)
- Sponsor agreement (if necessary)
After submitting all those, you now have to wait for some time before your TRN is allocated.
4. Keep your financial records
Every freelancer needs to maintain records of all their transactions for future reference when filing their tax returns. Those who are also ineligible to pay for the tax are also required to do the same. There is a software which helps freelancers who might be having troubles to generate their own invoices.
5. File your tax returns
Freelancers have to file their tax returns quarterly without fail. Furthermore, ensure that your records are right as errors and discrepancies can lead to heavy penalties.
Like any other country, in the UAE it is essential to abide by the law to avoid heavy fines. In the past, companies who failed to abide the law have received heave penalty and even lost their license. It is advised that before you start working in the UAE, you must be well-versed with the laws in the UAE. You can get in touch with the relevant authorities if you have any questions. There are many government websites to assist you as well.