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Profit Margin Scheme under UAE VAT: A Comprehensive Guide for Businesses
The UAE VAT regime generally requires VAT to be charged on the full value of taxable supplies. However, for certain categories of goods, this approach can lead to unfair double taxation, particularly where VAT incurred earlier in the supply chain cannot be recovered. To address this, the Federal Tax Authority (FTA) has introduced a special optional mechanism known as the Profit Margin Scheme.
This article provides a practical and detailed overview of the Profit Margin Scheme under UAE VAT, including eligible goods and transactions, calculation methods, invoicing and record-keeping requirements, and common examples to help businesses apply the scheme correctly.
What is the Profit Margin Scheme?
The Profit Margin Scheme is an optional VAT accounting method available to resellers of certain goods. Instead of charging VAT on the total selling price, VAT is calculated only on the difference between the selling price and the purchase price.
When Can the Profit Margin Scheme be Applied?
The Profit Margin Scheme may be applied in the following circumstances:
-
Resale of eligible goods acquired from:
- A non-VAT registered person, or
- A VAT-registered supplier who already applied the Profit Margin Scheme
- Sale of goods where input VAT recovery was blocked under Article 53 of the VAT Executive Regulations, such as motor vehicles available for private use.
The scheme can only be applied if the goods were previously subject to VAT. It does not apply to goods that have never been subject to VAT.
Importantly, the scheme is optional and can be applied on a supply-by-supply basis, provided all conditions are met.
Eligible Goods under the Profit Margin Scheme
The scheme applies only to specific categories of goods:
1. Second-Hand Goods
Second-hand goods are tangible movable items that are suitable for further use as they are, or after repair, without changing their original function.
Common examples include:
- Used cars
- Mobile phones
- Furniture
- Electronic equipment
2. Antiques
Antiques are goods that are more than 50 years old, such as antique furniture, artwork, or collectibles. Businesses must retain sufficient evidence to prove:
- The age of the goods, and
- That VAT was previously imposed on them
3. Collector’s Items
Collector’s items include:
- Stamps
- Coins and currency
- Items of scientific, historical, or archaeological interest
These goods typically derive value from rarity and collectability. Proper documentation is essential to support their eligibility under the scheme.
Importation of Goods – Key Considerations
As a general rule, the Profit Margin Scheme does not apply to imported goods, because import VAT is usually recoverable under normal VAT rules.
However, if import VAT recovery is blocked under Article 53, the scheme may be applied on resale.
Eligible goods & applicability of the Profit Margin Scheme
Example | Scenario | Applicability |
|---|---|---|
Repairs without change in nature | “Company A” a used car dealer purchases a vehicle from a private individual “Mr. B”, carries out servicing and minor repairs, and resells it | Since the car retains its original purpose, it qualifies as a second-hand good under the scheme. “Company A” can apply the scheme. |
Goods not previously subject to VAT | “Company A” purchased a used car from a private individual ” Mr. B” who acquired it on 2017. | Since, the car was purchased before the implementation of VAT, the car has never been subject to VAT & hence “Company A” cannot apply the scheme. |
Goods previously subject to VAT | “Company A “purchased a used furniture from a non-registrant ” Mr. B” in 2019. Mr. B has bought the furniture by paying VAT with proper Tax invoice. | If Mr. B provide the copy of tax invoice with company A, then Company A has proof that the furniture was previously subject to VAT & can apply the scheme when reselling the furniture, provided all the other conditions are met. |
Seller applied scheme | “Company A” purchases second hand goods from a non-registrant & sold some of these goods to “Company B” a registrant by applying the Scheme. | “Company B” can apply the scheme if he is reselling the goods provided all the other conditions are met. |
Resale of imported good | “Company A” a taxable antique dealer imports antiques into UAE and pays import VAT. | “Company A” cannot apply the scheme when reselling the antiques as the import VAT is recoverable by company A in accordance with the normal Input Tax recovery rules. |
Calculating VAT under the Profit Margin Scheme
Step 1: Determine the Profit Margin
Profit Margin = Selling Price – Purchase Price
- The purchase price includes the cost of the goods and any directly related costs such as transport and installation cost.
- The selling price includes all consideration received for the supply.
Step 2: Calculate VAT on the Profit Margin
VAT is calculated using the VAT fraction:
VAT = Profit Margin * (5/105)
Computation of VAT on Profit Margin Scheme
Example | Scenario | Computation | VAT Amount |
|---|---|---|---|
Eligible goods sold for profit | A used car dealer buys a car for AED 100,000 and sells it for AED 200,000. | Purchase Price (A) = AED 100,000 Selling Price (B) = AED 200,000 Profit Margin (C= B-A) = AED 100,000 VAT on Profit Margin = C*(5/105) = AED 4,761.90 | 4,761.90 |
Purchase price including costs | A business purchases a car for AED 100,000 and incurred AED 5,000 as transportation costs. They sold the car for AED 250,000. | Purchase Price (A) + associated costs = AED 105,000 Selling Price (B) =AED 250,000 Profit Margin (C= B-A) = AED 145,000 VAT on Profit Margin = C*(5/105) = AED 6,904.76 | 6,904.76 |
Goods with Blocked Input VAT (Article 53) | A Company buys a luxury car for the business & its CEO’s personal. The price of the car is AED 500,000 Plus AED 25,000 VAT. VAT was not recovered due to Article 53(1)(b) of VAT Executive Regulations. Company sells the car for AED 530,000 | Purchase Price (A) = AED 525,000 Selling Price (B) = AED 530,000 Profit Margin (C= B-A) = AED 5,000 VAT on Profit Margin = C*(5/105) = AED 238.10 | 238.10 |
Goods Sold at a Loss or Break-Even
If eligible goods are sold:
- At a loss, or
- With no profit
No VAT is payable under the Profit Margin Scheme. However, losses cannot be offset against profits from other transactions.
Computation of VAT on Profit Margin Scheme for goods sold at loss or no profit
Scenario | Computation | VAT Amount & Justification | ||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
“Company A” a used car dealer, sold four cars & applied the scheme on all of them.” |
| Even though, there is no profit during the whole period, the company has to account for VAT on the two cars that was sold on profit. i.e., AED 714.29. Since Cars 3 & 4 are not sold for profit, no output tax needs to be reported for the same. The loss made on the supply of car 4 cannot be settled off against the profits made on the supply of cars 1 & 2. |
Invoicing and Record-Keeping Requirements
When applying the scheme:
- A valid tax invoice must be issued
- The tax invoice must clearly state that VAT is charged under the Profit Margin Scheme
- The VAT amount must not be shown separately with the note mentioning in the tax invoice that vat is charged under profit margin scheme
Record-Keeping
Businesses must maintain:
- A stock register for goods sold under the scheme
- Purchase invoices or self-issued purchase documents for non-registrants
- Evidence that goods were previously subject to VAT
- Seller details, dates, consideration, and signatures where applicable
Proper documentation is critical in case of an FTA audit.
VAT Return Reporting
When applying the Profit Margin Scheme:
- The relevant checkbox must be selected in the VAT return
- Box 1 should include:
- Selling price net of VAT on the margin
- VAT amount relating to the profit margin
- Box 9 should include:
- Purchase price of goods intended for resale under the scheme
- No VAT amount
- Purchase price of the goods intended to be sold under the scheme should be reported in the Tax period these goods are acquired.
Goods sold at a loss are still included in the selling price figure, but no VAT is reported for them.
Example – Reporting in the VAT return
Company A purchased a mobile phone for AED 1,500 from Mr. B in January 2025 and sold it to Mr. C in March 2025 for AED 1,710. Company A files VAT returns on a monthly basis.
The purchase of the mobile phone should be reported in Box 9 of the VAT return for January 2025 with an amount of AED 1,500.
The sale of the mobile phone should be reported in Box 1 of the VAT return for March 2025, showing AED 1,700 in the amount column and AED 10 as VAT on the profit margin.
Conclusion
The Profit Margin Scheme is a valuable VAT relief mechanism for businesses dealing in second-hand goods, antiques, collector’s items, and assets with blocked input VAT. When applied correctly, it prevents VAT cascading and ensures that VAT is charged only on the true value added by the reseller.
However, the scheme comes with strict eligibility conditions, detailed documentation requirements, and specific reporting obligations. Incorrect application can expose businesses to penalties and reassessments by the FTA.
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