In the UAE, Value Added Tax (VAT) is generally charged on the full sale price of goods. For businesses dealing in second-hand or previously owned items, this can result in “tax cascading,” where VAT is effectively applied multiple times as goods change hands. To address this, the Federal Tax Authority (FTA) offers the Profit Margin Scheme an optional framework that allows eligible businesses to pay VAT only on the profit earned from a sale, rather than on the total selling price.

This guide walks resellers through the key aspects of the scheme, including eligibility, transactions, calculating VAT, record-keeping, and invoicing.

What is the Profit Margin Scheme?

The Profit Margin Scheme allows VAT to be calculated on the difference between the purchase price and selling price the profit margin rather than the full sale value. The profit margin is considered VAT-inclusive, meaning the VAT due is already factored into the profit.

The scheme is designed to prevent VAT from being charged multiple times on the same goods, particularly in the second-hand market.

Which Goods Are Eligible?

Only goods that have previously been subject to VAT in the UAE can benefit from the scheme. Eligible categories include:

• Second-Hand Goods: Tangible, movable items suitable for further use, such as used cars, mobile phones, or furniture. Non-usable scrap does not qualify.
• Antiques: Items more than 50 years old, such as artworks, vintage furniture, or collectibles. Resellers must provide proof of age and that VAT was previously charged.
• Collectors’ Items: Rare items like stamps, coins, or historic currency. Documentation must confirm that the items are considered collectibles and VAT was previously applied.

Important: Goods purchased before VAT was introduced on January 1, 2018, or imported goods for which import VAT was recovered, are generally not eligible.

Eligible Transactions

The scheme applies in the following situations:

1. Goods acquired from a Non-Registrant or a Taxable Person applying the Scheme:
   • The reseller can apply the scheme when selling eligible goods purchased from either a non-registered person or a taxable person who also applied the scheme.
2. Goods subject to Article 53 of the VAT Executive Regulation:
   • If a taxable person bought goods on which input tax was blocked (e.g., company cars for private use), the scheme can be applied when these goods are resold.
   • This applies to all such goods, not just eligible goods, but excludes cases where only partial input tax was blocked under Article 55 unless the item qualifies as an eligible good.
3. Imported Goods:
   • The scheme does not apply to goods imported into the UAE. Import VAT can be recovered normally, and VAT must be charged on the full value.
   • Exception: If import VAT was blocked under Article 53, the scheme can be applied when the goods are later resold.

Applying the Scheme: Optional, Not Mandatory

Resellers are not required to apply the Profit Margin Scheme. They can choose on a per-sale basis whether to use it. No prior FTA approval is needed.

Resellers opting into the scheme must:

• Issue a tax invoice stating that VAT has been calculated on the profit margin.
• Do not disclose the VAT amount separately.
• Maintain full records and comply with reporting obligations.

If the scheme is not applied, standard VAT rules apply, and VAT must be charged on the full sale value of the goods.

Calculating Profit Margin and VAT

Understanding VAT treatment is essential for resellers, as it affects pricing, compliance, and profitability. Here’s how to calculate VAT under the Profit Margin Scheme:

Step 1: Calculate the Profit Margin

Profit Margin = Selling Price – Purchase Price

• Purchase Price: Includes the amount paid for the item and any additional costs necessary to make it ready for resale (e.g., transport, installation).
• Selling Price: Includes the amount received from the buyer and any mandatory extras linked to the sale (e.g., essential accessories).

Optional or separate services, like extended warranties, follow standard VAT rules and are not included in the profit margin.

Step 2: Calculate VAT on the Profit

Since the profit already includes VAT, use this fraction:

VAT = Profit Margin × (5 ÷ 105)

Or simply:

VAT = Profit Margin ÷ 21

Example:

• Purchase Price: AED 8,000
• Selling Price: AED 10,000
• Profit Margin = 10,000 – 8,000 = AED 2,000
• VAT = 2,000 ÷ 21 ≈ AED 95.24

VAT due on the sale is AED 95.24, not the full selling price.

Selling at a Loss

• No VAT is due if the item is sold at a loss or breaks even.
• Losses cannot be offset against profits from other sales.
• VAT is still payable on items sold at a profit, even if overall the reseller incurs a loss.

Special Case: Blocked Input Tax (Article 53 Goods)

If VAT was paid on a purchase but could not be recovered (e.g., a company car used privately), that VAT forms part of the purchase price when calculating the profit margin. This ensures the scheme is applied consistently.

Record-Keeping Requirements

To comply with the scheme, resellers must maintain:

• A stock record of all goods bought and sold.
• Purchase invoices for all transactions.
• Self-issued invoices for goods purchased from non-VAT registered individuals.
• Evidence that VAT was previously charged on the goods.

Proper documentation is critical, as the FTA may request proof during audits.

Invoicing Rules

When selling under the Profit Margin Scheme:

• Clearly state on the tax invoice that VAT is charged on the profit margin.
• Do not show the VAT amount separately.
• Showing VAT separately disqualifies the transaction from the scheme.

Key Takeaways

• The Profit Margin Scheme prevents VAT cascading on second-hand goods, antiques, and collectibles.
• Only goods previously subject to VAT are eligible.
• The scheme is optional, allowing resellers to decide on a per-sale basis.
• Accurate record-keeping and correct invoicing are essential for compliance.
• Proper application can reduce VAT costs while ensuring adherence to UAE tax laws.