Free zone: no legal basis for companies refusing to work with freelancers over VAT

Authority responds as firms avoid self-employed professionals that are not even required to register

Businesses have no legal basis to refuse to work with freelancers that are not registered for VAT.

That was the assessment of one free zone as it responded to reports that companies are telling self-employed individuals they won't work with them unless they have a VAT registration number.

As The National reported on Monday, some companies appear to fear being accused of colluding with those that trying to dodge the tax.

In reality, many freelancers cannot in fact register, depending on their earnings.

“Being VAT registered is viewed as a sign of prestige. However [the implementation of the tax] should not be viewed as a mandatory requirement to engage exclusively with VAT registered companies,” said Salik Khatri, Creative Zone’s senior tax and accounting adviser.

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.

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Mr Khatri said the Ministry of Finance imposed the minimum registration limit to safeguard smaller businesses from the extensive documentation and reporting that a system like VAT requires.

“Furthermore, the administration costs to the government in monitoring and regulating far outweigh the benefits of requiring businesses with a small turnovers below specified thresholds to register for VAT,” he said.

“That being said, it is absolutely legal to work with businesses that are not registered for VAT.”

Registration is optional for those earning between Dh187,500 and Dh375,000 because the government did not want to impose the additional administrative costs of running a fully compliant VAT system, which can run to several thousand dirhams a month.

“Furthermore, the voluntary registration limit also caters growing business that may have expenses that exceed their taxable turnover. Companies can also register if their UAE expenses exceed the Dh187,500 limit.”

By saying they would prefer to work with other VAT registered companies means that they would like to engage with other "established" entities,’ he added.

“Starting out as a small business it can be tough to compete against the big boys.

"Most people are aware of the VAT registration threshold, so voluntarily registering your business for VAT might give the impression that your business is bigger and more successful than it actually is,” said Mr Khatri.

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