Is VAT applicable to Freelance Professionals?
23

Dec 2020

The dawn of the world of the internet and technology has opened many doors to others, making things easier. The emergence of freelancing gave people the ability to work at home's comfort, or wherever they were, without even having to move to an office. As a result, the hustle and struggle of going to work every day are scraped off and one works just during their own chosen hours; this has been very beneficial to them. The government does not regulate freelancing business in many countries around the world hence it is not taxed. In the UAE, the case is different, The value-added tax was implemented in a bid to regulate the business.

New Law for Freelancers 

For VAT purposes, freelancers are divided into three brackets. 

  • Those who produce income over Dh375,000 per year must apply for VAT. 
  • Those who generate revenue between Dh187,500 and Dh375,000 have an optional choice of registration. 
  • Freelancers receiving Dh187,500 who cannot register under current law.

Although the categories can be a relief to unregistered low-income freelancers, they can fail to secure future work. That is because many UAE companies refuse to work with non-VAT registered freelancers. Additionally, freelancers in Freezone aren't required to keep accounts and they're not subject to audits. Think of all the time that frees up! The government just wants you to focus on building your business and generating deliverables.

Effect of the Law on Freelancers and Companies That Are Not Registered

Since there is an earnings threshold, some of the freelancers, start-ups, and SMEs (Small to Medium Enterprises) are supposed to be exempted from compliance with VAT legislation. Such organizations, however, risk reaching their profit margins by not filing for VAT.

Ultimately, unregistered freelancers/entities can not reimburse the VAT amount that they pay out to their suppliers. We have to either cover the burden of the VAT charges or integrate the tax into the prices of their goods. Thus, the cost to smaller companies of not registering is likely to be high.

Meanwhile, SMEs applying for registration will find themselves undertaking a daunting adjustment phase. Especially in terms of recalibrating product costs or conducting a comprehensive redesign of the program. The compliance costs are likely to be prohibitive for these SMEs or freelancers. Sole proprietorships may either lack the software or financial means needed to comply with the law successfully.

Advantages of VAT Registration for a Freelancer

Initially, the idea of having a VAT on freelancers was not accepted by anyone. However, the new regulations did come with a range of advantages for the freelancers.

Increased Freelancer – Client Trust

Trust is one of the significant impediments to establishing a successful relationship between clients and freelancers. No one trusts the other, really. When a freelancer complies with VAT, this will make the customer trust them and be more willing to take on more business with them. This tool is often used in the name of freelancers to remove scammers found all over the internet, but their main task is unsuspecting customers. Getting tax free would also shield legitimate self-employed citizens from these scammers. 

Ability to Levy Taxes

A TRN number you obtain after you have registered for VAT helps you to collect the tax on your jobs. The tax, which your clients charge, is paid directly to the government. Another nice thing is that you only pay taxes on the profits you have earned, or in other terms, the added value.

VAT Registration Process For a Freelancer in UAE

If you're a UAE entrepreneur, you need to be aware of VAT implementation in UAE.  Let's look at the step by step process for VAT registration in UAE.

1.Check Whether You Would Be Eligible for VAT Registration or Not.

Based on the new law check-in, which tax you fall. Revenue includes taxable, commodities, exports (zero-rated products), imports, and reverse charges goods.

2.Get a License

When a freelancer is not currently licensed, he must get a license that needs an employer's permission. In the UAE there are several free zones offering freelance licences.

3.Register Online 

After licensing, freelancers can proceed to the online phase of VAT registration.

  • Go to the FTA portal
  • Build a new account to sign in by entering a name, password setting and email verification. 
  • Once login, register for VAT by giving the following details,
  1. Trade license
  2. Certificate of Incorporation
  3. Description of business activity
  4. MOA or AOA
  5. Sponsor agreement (if applicable)
  6. Revenues of the last 12 months
  7. Projected future revenues
  8. Freelancer Passport and Emirates ID copy
  9. Bank account details
  10. Customs details (if applicable)

Wait for your registration approval and allocation of TRN (tax registration number) for a certain period after submitting all the necessary information.

4.Keep Your Financial Records

All freelancers should keep timely and correct financial records; even those that are not required to register by law. VAT will apply to all of the ecosystems. Even if a freelancer falls into the third bracket of the law, there is a risk that his clients and suppliers will fall into the VAT class and may suggest that invoices be provided in a specific manner.

Relevant Points to Remember in Terms of VAT Compliance

  1. TRN should be reported on all invoices
  2. All invoices should be numbered sequentially 
  3. Total costs and VAT should be recorded separately so that people need to be aware of the VAT component.

5.VAT Compliant Software

There is plenty of software compliant with VAT that can produce related invoices in the market. If a freelancer has difficulty adjusting to new software, he may go for training or outsource his accounting work to some other company that manages the accounts of freelancers on his behalf.

6.Schedule the Returns on Time. 

Freelancers are expected to file each quarter of his / her returns online. 

  • Determine output-tax collected through invoicing. 
  • Determine input-tax duty paid to suppliers. 
  • What a freelancer would pay to the government is the difference between the two above. 

Make sure your returns are correct because, in case of inconsistency or mistake, there are hefty penalties.

Take Help of Third-Party Consultants

JAXA professionals determine the business structure requirements of a client and prepare VAT execution based on the company's financial strengths & weaknesses. Companies can adopt different structures depending on the type & goals of the company. As an Experienced consultancy, we also help businesses to select the most suitable structure for maximum benefits & enhanced revenue. Along with that, we ensure data confidentiality of our clients and offer timely assistance through qualified chartered accountants with international tax experience. Contact us today and let us be a part in your journey of success.