UAE VAT for Freelancers: A Complete Guide

If you are a freelancer in the UAE, you must understand how VAT in UAE affects your self employed business. 

In UAE, freelancers are treated like any other service provider for VAT compliance. This means that they are required to charge VAT, generate VAT invoices, and file and pay the collected VAT, just like any other service provider if their turnover exceeds AED 375,000 in the last 12 months.

This guide answers common VAT questions for freelancers in the UAE, covering everything from VAT rates and registration to required compliance.

Who are considered Freelancers?

A freelancer is an individual who works independently, offering services to clients on a project or contract basis rather than being employed full-time by a single company. Freelancers often have specialized skills in areas such as writing, design, programming, consulting, marketing, or other professional services. 

Freelancers typically work for multiple clients and are responsible for their own business operations, including invoicing, taxes, and compliance with relevant regulations, like VAT.

VAT for Freelancers in UAE

Freelancers in the UAE are treated like any other service provider under VAT laws, meaning they are subject to VAT regulations if they meet specific criteria. Here are the VAT liabilities for freelancers:

VAT Registration Requirements: Freelancers must register for VAT if they exceed the income and taxable supplies threshold set by the UAE VAT laws by the FTA. 

If liable for VAT registrations , freelancers must adhere to the following

VAT Rate: Freelancers must charge a standard VAT rate of 5% on taxable services.

Invoicing: Freelancers are required to issue VAT-compliant invoices to clients, clearly indicating the VAT charged.

Payment of VAT: Collected VAT, after deducting input VAT (from business-related expenses), must be paid to the authorities on time.

Filing VAT Returns: Depending on their registration, freelancers must file their VAT returns either monthly or quarterly.

Steps for VAT Registration for Freelancers in UAE  

Here are the key steps for registration of VAT for freelancers in UAE:

1. Assess Your Financials: Analyse your finances and growth projections of your future cash flows to understand the right time to register for VAT. You can consider how much you earn currently, your potential growth, and the benefits of VAT registration.
2. Understand Tax Grouping (Optional): Typically, at this stage, if a company is part of a group of companies, it can create a tax group for better VAT management. However, as a freelancer, this might not apply to you.
3. Create an FTA Account: Register for an account on the FTA website and start the VAT registration process. Provide basic business details such as name, address, contact information, and bank details.
4. Gather Supporting Documents: Prepare supporting documents that you must submit to complete the registration process. The documents might include:

• Passport 
• Copy of the Emirates ID
• Trade licence
• Description of financial and business activities
• Bank account information
• If applicable, a sponsorship agreement
• Past revenue and turnover details (for 12 months)
• Future projections of revenue

Make sure that you have digital copies of these documents ready at the time of registration.

5. Submit Your Application: After uploading the necessary documents, the FTA will review your application. It can take up to 20 working days before deciding on your eligibility.

How to Calculate and File VAT Return as a Freelancer?

Freelance should also calculate and pay their VAT liabilities every quarter/month depending on VAT Charged on sales and purchases

Calculating VAT Liability

Calculating VAT involves finding out your output VAT (VAT you charge on your sales) and your input VAT (VAT you pay on business-related purchases). 

Calculate Your VAT Liability: Use the formula: 

VAT Payable = Output VAT − Input VAT

Example:

• If you earned AED 500,000 in taxable supplies, your output VAT would be AED 25,000.
• If your business expenses included AED 10,000 in input VAT, your VAT payable would be AED 15,000 (AED 25,000 - AED 10,000).

File Your VAT Return

• VAT returns must be filed within 28 days after the end of your tax accounting period (monthly or quarterly, depending on your registration type).

Example: If your quarter ends on September 30, you need to submit your return by October 28.

• Log in to the Federal Tax Authority (FTA) portal.
• Complete the VAT return form with your calculated output and input VAT.
• Pay any VAT liability as required.
• Submit the form electronically.

VAT Treatment for Freelancers in UAE Providing Services Outside UAE

• Services provided to clients outside the UAE are considered "exports."
• Exports of services are zero-rated under UAE VAT (0% VAT charged).
• Freelancers can recover input VAT on business-related expenses even if no VAT is charged on exports.
• Key documents required for compliance include contracts and invoices proving the client’s location outside the UAE.
• Records must be maintained for at least 5 years.

VAT Treatment for Freelancers Outside UAE Providing Services in UAE

• Services provided by freelancers outside the UAE to clients within the UAE are subject to the reverse charge mechanism.
• The UAE-based client (if VAT-registered) is responsible for accounting for the VAT on the freelancer’s behalf.
• The VAT rate applicable is 5%, and the client pays it directly to the Federal Tax Authority (FTA).
• Non-UAE freelancers do not need to register for VAT in the UAE.
• The UAE client must ensure they comply with reverse charge procedures.
• If the client is not VAT-registered, different rules may apply depending on the specific circumstances.

Why should a freelancer comply with VAT Regulation?

Freelancers can voluntarily register for VAT, even if their annual turnover is below the mandatory requirement of AED 375,000. This has a lot of benefits for the freelancer, especially those who are expecting growth, like:

• Claim Input Tax Credits: By registering for VAT, freelancers can deduct the VAT paid on their purchases from the VAT they charge on their sales, helping to reduce costs—especially if they have significant expenses.
• Improved Invoicing and Record-Keeping: VAT registration ensures that your invoicing and record-keeping are accurate and consistent, making it easier to file VAT returns and enhancing your financial oversight.
• Enhanced Credibility: Being VAT registered can boost your business's credibility. Many clients prefer to work with companies that have a strong credit history, and VAT registration contributes to that.
• Eligibility for VAT Refunds: If you pay more VAT on your purchases than you collect from sales, you may qualify for a VAT refund, which can improve your cash flow.
• Access to Larger Projects: Many larger companies require their vendors to be VAT registered to participate in contracts, making registration essential for freelancers looking to bid on substantial projects.
• Government Contracts and Tenders: Certain government contracts and tenders require VAT registration as a prerequisite, so being registered opens up more opportunities for freelancers.

Consequences of Failing to Comply with VAT Obligations

Failing to meet your VAT obligations can lead to significant legal and financial repercussions, including:

• Financial Penalties: You may face fines of up to AED 20,000.
• Legal Actions: Ongoing non-compliance could result in audits by the Federal Tax Authority (FTA).
• Damage to Reputation: A non-compliant status can negatively impact your professional reputation, making it challenging to attract new clients.
• Loss of Input VAT Claims: Without proper VAT registration and compliance, freelancers may miss the chance to reclaim input VAT on business expenses, ultimately increasing overall costs.

Conclusion

VAT registration is extremely important, especially if your income as a freelancer crosses AED 375,000. VAT compliance, in a way, future-proofs your work and adds to your credibility, opening doors to take up larger orders.

By staying informed and following the necessary steps to handle VAT, you can focus on growing your business stress-free.