"Basically on January 1 I'll become an unpaid tax collector, as if life wasn't complicated enough running a small business," sighs Chris Pickford, a 30-year-old British personal trainer in Dubai, as he mulls the impact of value added tax (VAT).
The introduction of VAT, rolling out on January 1 throughout the UAE, has small business owners concerned at the additional administrative burden they will bear.
“I don’t see how I’m going to benefit with this,” said Mr Pickford.
If you’ve ever run your own small enterprise in countries where VAT is applicable, you’ll know that being a registered supplier can mean sleepless nights, mountains of paperwork and developing an obsession for collecting receipts. And while the UAE’s initial five per cent rate is only a small fraction of what some other countries impose, the admin workload will be just as significant here as anywhere else.
Keren Bobker, Senior Partner at Holborn Assets in Dubai, and a regular financial contributor to The National, recognises the worries now being faced by sole traders and small business owners. "The main focus of [UAE] VAT has been on how it affects larger businesses and the end consumer with little focus on businesses with low turnovers," she said.
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For Mr Pickford, there is a very real temptation to bring his annual earnings down to just beneath the VAT threshold, which the UAE has set at Dh385,000. “I’m bringing in about Dh400,000 at the moment and it’s tough because I work such long hours and don’t have time for much of a social life,” he said.
“I’m certain that I’m going to lose a few clients once I start charging them VAT, so my turnover might naturally drop beneath the threshold anyway. It’s a strange kind of middle ground that I’m in at the moment and anyone I turn to for advice just shrugs their shoulders and says that we’ll find out soon enough," he added.
Reducing one’s turnover could indeed make sense for some small business owners when they realise how much time and effort they will have to put into record keeping and filing returns, although everyone would be best to document cash flow from now on in any case. And there’s that word that so many in other countries turn to, in order to circumvent the law: cash. How often have we heard, or enquired about, discounts for cash? No paper trail, no records, no questions asked – could the same thing end up happening in the GCC?
“It is known that in countries that have VAT there has always been a thriving cash economy,” said Ms Bobker, “where the customer pays in cash, avoiding the addition of VAT to a bill and the tradesperson doesn’t declare the income through their books. The saving by this illegal action is significantly more than it would be in the UAE where there is only VAT at five per cent and no income tax, as opposed to places with both VAT and income tax in double figures.”
Ms Bobker points out that there are plenty of small businesses operating in the UAE with turnovers of less than the Dh385,000 threshold and that these are not obligated to register unless that income climbs. “If a business has not registered, they are not permitted to add VAT to their prices or invoices. They will, however, have to pay the VAT on anything they purchase themselves, just as any consumer will. This means, in theory at least, that supporting small businesses may come with a slightly lower price tag," said Ms Bobker.
She added that one issue her company has started seeing already is small companies, that legitimately do not need to register, being asked for their Tax Registration Number when providing a service to a larger company. "As they cannot provide this, they are having issues in dealing with some organisations. It seems that are a few accounts departments who are not fully au fait with the rules and how they apply to all," she noted.
For media executive and part time DJ, Mandy Witham, the waters are still muddier than she’d like. “A lot of singers, DJs and creatives in the UAE have full time jobs and work part time in the entertainment industry, and I know a lot of them have no idea how VAT will affect them or what they should do. I have a legitimate company and the contracts I have don't take me above the VAT threshold, so I'm not charging VAT at the moment but I’ll start keeping accounts from January 1 in case they are needed," she said.
Death and taxes – there’s no escaping either, even here, but as anyone who’s fallen foul of the law regarding what they owe the treasury would no doubt attest, it’s better to be safe than sorry.
Ignorance will be no excuse, no matter how much confusion surrounds us.
