How The UAE’s New VAT Law Will Impact Freelancers And Unregistered Businesses
The UAE's widely anticipated VAT law has come into effect on January 1, 2018. The tax rate is pegged at a modest 5%. Officials are hopeful that the new law will be the means of diversifying the UAE's economy. Other GCC (Gulf Cooperation Council) countries are slated to follow suit with their own VAT laws by 2019.
Education and healthcare are zero-rated as per the new UAE VAT. The tax will allow the UAE to continue providing important government-funded public services such as medical care, sanitation services, recreational parks, law enforcement services, roads, and schools.
Companies affected by Tax
Businesses with annual incomes of more than AED 375,000 must register for VAT. However, companies with annual incomes less than AED 375,000 but over AED 187,500 will have the option to choose. The industries that are zero-rated are Private and Public school education ( tuition fee), Essential health care, the first sale of residential property, export of good and services.
How The Law Will Impact Freelancers and Unregistered Businesses.
Since there is an earnings threshold, it is expected that some of the freelancers, start-ups and SMEs (Small to Medium Enterprises), will be exempt from complying with the VAT law. However, those entities risk a hit to their profit margins by not registering for VAT.
Ultimately, unregistered freelancers/ entities cannot recover the VAT they pay out to their suppliers. They must either absorb the cost of the VAT fees or incorporate the tax into their product prices. So, the cost of non-registration to the smaller businesses is likely to be high.
Meanwhile, SMEs who qualify for registration will find themselves navigating a challenging transition process in terms of recalibrating product prices, renegotiating customer contracts, or performing an exhaustive system overhaul. The cost of compliance for these SMEs or freelancers is likely to be prohibitive. Sole proprietorships may either lack the necessary software or fiscal means to comply successfully with the law.
So, while the new VAT law does not necessarily mean the end of freelancing, it presents a significant challenge to these types of businesses.
At Legends Accounting, our goal is to provide focused and efficient solutions that address your challenges. We will advise you on registration matters and the compliance process. Don't navigate the transition alone: contact us today for actionable solutions that work.