Although the introduction of VAT will cost the organisational change consultant up to Dh3,000 a month to pay for an accountant to help him keep his books, he will at least continue to secure work going forward.
Others may struggle though, experts have revealed.
Freelancers are split into three brackets for the purposes of VAT: those who generate revenues of more than Dh375,000 a year, who must register for VAT; those generating revenues of between Dh187,500 and Dh375,000, for whom the choice is optional; and freelancers earning under Dh187,500, who cannot register under current rules.
While the categories may be a relief for low-income freelancers that have not registered, they may struggle to secure work in the future. This is because many UAE companies are refusing to work with freelancers that are not VAT registered.
“I have spoken to a couple of tax experts and accounting firms and they are saying that almost all of the companies their clients are coming into contact with are telling them if they don’t have a TRN (tax registration number) then they cannot work with them,” says Steve Ashby, the founder of Businessmentals, a consultancy for freelancers.
“A freelancer can say ‘I don’t have a TRN and I don’t need one,’ and they will say’ you are telling us that but we don’t know. We don’t know what will happen to us if we work with you, without a TRN and we pay you’.
This is the reality being faced by Angela, a freelance production specialist based in Abu Dhabi and licensed by twofour54. She would prefer not to register and undertake all of the responsibilities associated with a tax registration number, like quarterly returns, but she says she may ultimately have to do so if her clients demand her TRN.
“I work in the production side of things so I don’t have gear that I can buy. Perhaps a laptop once in a while, and then I am saving Dh200 [by claiming back the VAT – which only VAT registered companies can do], for all that paperwork?” says the freelancer, from South Africa who asked for her name to be changed for the article.
“But I have heard directly and through a lot of other freelancers, that many production companies will refuse to work with those who are not VAT registered.”
Mr Ashby says it is understandable for companies to refuse to work with freelancers not VAT registered.
“Put yourself in their shoes,” he says. “They could be colluding with you and breaking the law. For all they know, you could be earning a lot more than Dh375,000.”
But there is a solution for those not currently earning enough to register.
Freelancers earning under Dh187,500 can team up with others to ensure their revenues meet the minimum threshold requirement.
This is a trend Rajeev Samtani, the cofounder and managing partner, Xcel Accounting has encountered.
“Some freelancers are getting together to collectively make sure that their revenue meets the threshold requirements for VAT registration,” he says.
“They come under a single licence and form a business. They still maintain their separate profit centres within the business, but for external reasons, their revenues are collectively considered for VAT registration purposes.”
Mr Ashby expects to see more of these type of collectives going forward.
“In this particular market, the amount of money an average freelancer makes puts them under extraordinary pressure, if they are going to operate on their own,” he says.
“Hence I think what will happen is these collectives. I think people will flock to them, get properly licensed as freelancers, and be able to get work and sleep at night knowing that they are not going to be fined for allocating work out that they are supposed to pick up VAT on.”
Alternatively, freelancers earning under Dh187,500, can continue working, however their options may be limited to companies that do not require their contractors to have a TRN.
“I can’t register for a TRN because I earn less than Dh187,500,” says one Abu Dhabi based freelancer, who asked not to be named.
“I’ve have heard that some companies are refusing to work with freelancers who don’t have a TRN, but I haven’t come across any yet. I hope I’ll keep my regular work but we’ll see what happens. My licence is up for renewal in September and if I don’t get much work between now and then I won’t be renewing it.”
Others who must register by law, like Mr Stojanov, must either manage their accounts themselves, or outsource the work elsewhere.
He generates revenues of more than Dh375,000 a year and plans to hire an accountant to ensure his tax returns are filled out correctly.
While he expects to pay anywhere from Dh500 to Dh3,000, he says he formulates his charges based on the value he creates, therefore he can factor in those costs when pricing his projects.
“We are not earning millions of dirhams a year – so that’s a significant percentage of my cost outlay,” says the Australian consultant based in Dubai.
While filing tax returns may be a hassle for some freelancers, Mr Ashby believes there is a significant upside to registering.
“It is forcing SMEs and freelancers to become much more professional,” says Mr Ashby.
“Most people only make business improvements if there is a reason. And right now there is a massive reason. If I don’t pay my VAT, as far as the government is concerned, I am stealing from the government. And I won’t take too kindly to that. Therefore, I have to change.”
He says many freelancers will have to work differently going forward.
For some, the first part of that is to get a licence, as many freelancers working in the UAE, ‘the incognitos’ as Mr Ashby calls them, do not have one.
According to Mr Ashby, an estimated 100,000 licensed freelancers work in the UAE, with another 100,000 to 150,000 ‘incognitos’ that do freelance work on the side in addition to their own jobs to earn extra income.
Mr Ashby says from a government perspective, VAT is a good way of smoking the ‘incognitos’ out, as companies will refuse to work with them. So if they want to keep the work, either on the side, or as a full-time freelancer, they must now get licensed, he says, adding that it only takes a couple of hours to do this.
Yet even freelancers that are legally licensed and VAT registered are struggling to collect VAT, which is affecting their earnings.
Elias Trad, a freelance director of photography licensed in twofour54, registered for VAT with the Federal Tax Authority, because his business generates revenues of more than Dh375,000 a year.
But when he dutifully added 5 per cent at the bottom of his first invoice of the year, adding Dh350 to the Dh7,000 total, his client refused to pay it.
“The production company wrote me a cheque for only Dh7,000. I asked them to write another but then they said ‘If we do this, we can’t pay you today. We will have to pay you later’,” he says.
Mr Stojanov has faced a similar issue. He added the 5 per cent VAT charge to project proposals which have yet to be accepted, but the companies have complained about the additional charge.
“People say ‘you can’t change the price’,” he says. “And I have said ‘the price was this before and now it’s before plus 5 per cent. If you had paid the invoice before it would have been fine, but now you have to pay the 5 per cent’.”
For freelancers whose income is already inconsistent, with many not paid on time, VAT could complicate the situation further, Mr Stojanov says.
“There is going to be increasing pressure,” he adds.