Freelancers need to focus on details to stay aligned with UAE corporate tax

Business owners in the UAE must ensure adherence to corporate tax guidelines, including claims for cars and phones. Silvia Razgova / The National

To truly understand something, we need to experience it.

Today, let’s spend the morning with an independent technical freelancer. There are many of them, in different roles, in the UAE. Let’s call him Lenny.

Lenny has a trade licence, without which he can’t trade.

Having consulted friends and peers, he bought the cheapest option. His is a vanilla business. Uncomplicated with an owner who doesn’t want to play fast and fancy with regulations.

It’s a sole establishment licence. This would more commonly be called a sole trader in the western world.

He is in good compliant standing with the Department for Economic Development. Properly licensed, he can sell his skillset to willing buyers.

What he cannot be is an employee of his own company. Sole establishments are legally indistinguishable from their owners. If the firm was an LLC, then he could be an employee. Why does this matter?

Watch: UAE corporate tax: What you need to know

Monies paid to the owner of a sole establishment are dividends. The same for a documented employee of an LLC is considered a salary, unless formally declared otherwise.

Under corporate tax, the latter is deductible against taxable revenue, however, the former is not.

Waking up, Lenny instinctively reaches for his mobile phone. Without this, his business would be less efficient. What could be more wholly and necessarily required to complete his contracted tasks?

In looking for costs to deduct against corporate tax, this one appears to be a slam dunk. In VAT, the supplier invoice would need to be made out to the company to reclaim input VAT. This assumes Lenny has turnover in excess of Dh375,000 ($102,110) in any 12-month period and has registered for the tax.

Corporate tax says such expenses should be permissible. However, will personal calls need to be removed? Will evidence be required that proves they were?

On the positive side, why should the invoice need to be in the company’s name? In a larger firm, wouldn’t a freelancer be able to charge agreed expenses to the assigning party? Wouldn’t those then be allowable against its tax bill?

Are we moving into a regime that treats employees and third parties differently for the same costs? That would not appear to make sense.

Here appears to be a potential divergence between corporate tax and VAT. What makes this an interesting point of conjecture is that both are overseen by the same regulatory authority.

The answer is, we don’t know. Much detailed legislation is still to come from the three authorities issuing it. These are the Cabinet, the Ministry of Finance and the Federal Tax Authority. Keep an close eye on these releases.

Breakfast eaten, Lenny gets into his car. His work brings him all over the country. For him, work mileage trumps personal every month. Knowing this would quickly depreciate a car he owns or rents.

Additionally, he has equipment he needs for his work and this SUV is perfect for transporting it.

Intuitively, he knows he wouldn’t be able to claim the cost of a car against his own company. He owns it under his name and it sits parked outside his home every evening. The lease cost and petrol on the other hand; shouldn’t that be allowed as claims?

The petrol should be, although we don’t know on what basis. In the UK, there’s a per mile allowance. This would necessitate keeping a verifiable record of movement. Would the receipts from the petrol station be required? As these are thermal receipts, there would be nothing to review after a few years, so what would be the point?

A change in the rules allowing scanned or photocopied receipts would be welcomed by the business community. From an ESG perspective, it would also enhance the green commercial footprint of the UAE.

Then there is the matter of the lease costs. A vehicle is needed to get to Lenny’s place of work, but why should that be deductible? Surely that’s a cost that should be incorporated into his quoted fees? That position would be a reasonable one for the tax authorities to take. There is the small matter of the personal usage.

What about the equipment in the car? As long as it is purely for the purpose of supporting the delivery of services and is owned by the company, then these should be good. What if they were owned by Lenny personally? In this case, Lenny is leasing them to his business, who is renting them to its clients. The legal implications in this scenario could be quite different.

I have been asked variations on these questions by a lot of technical professionals. Understand what is allowed and do the right thing.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE