Unintended effects of any tax rollout
‘I don’t think that word means what you think that word means...” goes the line from the cult movie Bride. And so it is with VAT and its unintended consequences. “Oh, we didn’t mean it to do that!” might be the current in-joke in some circles.
Here’s a few unintended consequences examples we’ve heard already, and it’s only been two weeks.
The rapid rise of cash for work, no invoices The time-honoured scourge of all governments, everywhere. An inevitable consequence of a tax is that everyone gets busy on finding ways to not pay it. I know of a village in Wales where the only place that accepts cards is the co-op. The butcher, the soft furnishings shop, the cafes, the mechanic’s garage... all cash, thanks. An Indian friend of mine said she feels right at home now, paying cash for everything.
Tax evasion is an entire industry on a global scale Just ask all the people who paid cash for properties in Dubai that they’re never going to live in! As ye sow, so shall ye reap. Tax avoidance is just licensed tax evasion.
Tax avoidance by companies like Apple and Facebook is sort of legitimate — but it leaves a bad taste in the mouth for the average small business owner who cannot afford sophisticated tax avoidance schemes. What about the freelancers who don’t have to register for VAT registering because they don’t want to tell their clients they earn less than Dh375,000?
Or the clients who refuse to work with anyone who doesn’t have a TRN, whether they legitimately don’t have to register or not.
There are freelancers registered in certain free zones who think they’re OK, but in reality (as far as I can gather) it’s only if they work with clients in the same free zone. If they do work outside the free zone (which of course is highly illegal, and no one would EVER think of doing that), they will find that the client demands a TRN.
Not surprisingly, many freelancers think it is easier just to absorb the tax and not charge the client, because they are not too good at negotiating. Are they crazy? Five per cent on their top-line is more like 10 per cent on their bottom-line. Therefore, they are giving away much more than they realise.
On top of which, charging the client VAT is just sound business practice. Someone has to pay VAT by law, and in this instance, it is the client. It’s not even a negotiating point.
Moreover, if freelancers think that the client will thank them for absorbing the tax, they will not. But they may think the freelancer is stupid.
Financial records?
The number of freelancers who have good financial records is probably around 5 per cent, give or take a margin of error of 5 per cent. Now every freelancer has to have good financial records, so that they can show the VAT collected, paid and the balance. Not only do they have to pay tax, but now have to run financial records.
However, there is some good news. The introduction of VAT forces better business management. It will help professionalise a sector that currently prides itself on being composed of untalented amateurs when it comes to business. How many freelancers proudly state that while they’re “really ace” at graphic design they just don’t get it at business.
With VAT, it’s simply a matter of ask (so that you have all the information to make good decisions); adapt (create options, start financial records, negotiate properly); and act (get started now).