The highly anticipated UAE VAT law entered into force on January 1, 2018. The tax rate is set at a 5% mode. Officials expected the new law to be a means of diversifying the UAE economy. It was predicted that other countries of the GCC (Gulf Cooperation Council) did the same with their own VAT laws for 2019.
Education and medical care have a zero rating according to the new VAT of the UAE. The UAE tax will continue to provide important government-funded public services, such as medical care, sanitation services, recreational parks, law enforcement services, roads and schools.
Companies affected by taxes
Companies with annual revenues of more than AED 375,000 must be registered for VAT. However, companies with annual revenues below 375,000 AED but above 187,500 AED the option to choose. Zero-rated industries are education in public and private schools (tuition), essential medical care, the first sale of residential properties, export of goods and services.
How the law affects independent workers and unregistered companies.
Since there is a revenue threshold, it is expected that some of the freelancers, new businesses and SMEs (small and medium enterprises) are exempt from complying with the VAT law. However, these entities reach a blow in their profit margins by not registering for VAT.
Ultimately, the self-employed / unregistered entities cannot recover the VAT they pay to their suppliers. They must absorb the cost of VAT rates or incorporate the tax into the prices of their products. Therefore, the cost of the lack of registration for small businesses is likely to be high.
Meanwhile, SMEs that register for registration will find themselves in a challenging transition process in terms of recalibrating product prices, renegotiating customer contracts or conducting a comprehensive system review. The compliance cost for these SMEs or freelancers is likely to be prohibitive. Sole proprietorships may lack the necessary software or fiscal means to successfully comply with the law.
So, while the new VAT law does not mean the challenge of independent work, it presents an important challenge for these types of companies.
At RTD, 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 practical solutions that work.