Whether used cars are subject to VAT?

This is an updated article of the same subject line “Whether used cars were subject to VAT?” which appears in the blog section at (https://www.spectrumaccounts.com/whether-used-cars-were-subject-to-vat/). The below article is a detailed discussion in a more understandable format for the reader to understand.

Introduction

The Federal Tax Authority (FTA) has called on retailers to verify that used cars were subject to the Value Added Tax (VAT) before applying the Profit Margin Scheme in December 2018, during an awareness workshop for car dealers.More than 100 dealers, experts and stakeholders participated in the workshop, which was organised by the FTA in collaboration with the Dubai Municipality and Al Aweer Auto Market in Dubai. Here are few key bullets derived from the workshop conducted-

  1. The workshop applauded the high tax compliance rate and increased tax awareness among businesses in the automotive sector, and reiterated its commitment to empowering businesses and also addressed the following queries raised during the meeting held-
    • What all the business in the automotive sector effected with the implementation of VAT?
      All the businesses in the automotive sector, including but not only limited to:

      • New car dealers
      • Used car dealers
      • Servicing and parts’ suppliers
    • Is VAT chargeable on all supplies made by businesses in the automotive sector?
      Supplies made by businesses in the automotive sector are generally subject to VAT, including but not limited to:

      • Sales of new and used cars
      • Sales of car parts
      • Service centres’ services, warranties, and related insurance products

      However, supplies of qualified means of transport, such as buses that are designed or adapted for public transportation of 10 or more passengers and are actually used for public transportation arezero-rated for VAT purposes.

    • Is there a need for businesses in the automotive sector to register for VAT?
      Businesses in the automotive sector who make taxable supplies (which include zero-rated supplies) in the UAE are required to register for VAT provided the value of their taxable supplies and imports in the last 12 months exceeded, or is expected to exceed in the next 30 days, the mandatory registration threshold of AED 375,000.
      Businesses may also voluntarily register for VAT if the value of their taxable supplies and imports or taxable expenses incurred in the last 12 months exceeded, or is anticipated to exceed in the next 30 days, the voluntary registration threshold of AED 187,500.
    • Are tax invoices required to be issued?
      Yes, tax invoices are required for all standard-rated supplies.

      • Simplified tax invoices may be issued where the supply is made to an unregistered recipient or the consideration for the supply made to a registered recipient is AED 10,000 or less.
      • Where VAT is charged with reference to the profit margin scheme, the tax invoice should clearly state that VAT was charged with reference to the profit margin scheme and must include all other information required on a tax invoice except the amount of VAT.
    • Are the businesses in the automotive sector permitted to recover input tax?
      Yes, businesses in the automotive sector making taxable supplies are eligible for a full recovery of input VAT, with the exception of blocked items such as:

      • Certain entertainment services.
      • Purchased, leased or rented motor vehicles that are available for personal use.
  2. The authority also introduced various procedures and tax treatment for the key sector, highlighting the FTA’s steps to address any obstacles that businesses face.
  3. C) “Tax laws in the UAE have prioritised the establishment of an environment conducive to continued growth and prosperity in commercial activities – a sector of great importance in the government’s plans to diversify sources of income,” FTA director-general, Khalid Ali Al Bustani, asserted.
  4. The FTA experts presented a detailed explanation of the procedures and legalities surrounding VAT on the sale of new and used vehicles. In this context, the following points have been discussed briefly-
    • Can we apply the profit margin scheme to account for VAT on the sale of used cars?
      Yes, we can apply the profit margin scheme to account for VAT on the sale of used cars only if the following conditions has been satisfied:

      • When the used cars are purchased from either a person who is not a registrant of VAT or from a taxable person which already applied the profit margin scheme on the same goods.
      • The profit margin scheme may only be applied to the supply of goods that have previously been subject to UAE VAT on the purchase. In other words, if the cars are purchased before the effective date of VAT in UAE, then Profit Margin scheme cannot be applied and full selling price needs to be taken for VAT purpose. (Detailed in Profit Margin scheme blog)
        https://www.spectrumaccounts.com/profit-margin-scheme-v2/
        Link for the reference.
    • They also shed light on the Profit Margin Scheme, its terms and conditions, the supplies eligible for it, and the obligations for the Taxable Person.Please refer to the Public Clarification on Profit Margin Scheme – VATP002 for further details(link for blog given above) – (bullet points from clarification)
      • The Profit Margin Scheme is only applicable to supplies that already incurred VAT prior to the current supply. Therefore, the stock of used goods purchased before Federal Decree-Law No. (8) of 2017 went into effect (or that didn’t incur tax for any reason) do not qualify for the Profit Margin Scheme, and VAT is instead calculated on the items’ full price.
      • The experts went on to note that the Taxable Person cannot calculate tax as per the Profit Margin Scheme if a Tax Invoice or other equivalent document was issued, or if the amount of incurred tax was mentioned in the invoice.
      • They also explained that the profit margin, is the difference between the purchasing and selling price; it is considered to be inclusive of tax.
      • It also gave brief about what are the conditions for a business to registered for VAT can apply the Profit Margin Scheme on eligible goods.
  5. They have also discussed on these points for the better understanding with respect to of VAT
    • Are gifts and giveaways subject to VAT?
      Where goods are given away to consumers for free, this supply is likely to be considered as deemed supplies unless:

      • The relevant input tax was not recovered on the related goods
      • The value of supply to each recipient does not exceed AED 500 in a 12-month period;
      • The output tax due for all deemed supplies per person made in the 12-month period is less than AED 2,000.
    • Are repair services and parts provided under warranty subject to VAT?
      VAT is applicable in the first instance on:

      • Sale of vehicles that include warranty and
      • Warranty packages purchased separately by the customer.

      Any subsequent supply of repair services and parts under warranty claims is not subject to VAT separately as long as no other amount is paid.

    • What happens when the servicecentre reclaims costs of supplies made under warranty from a manufacturer based outside the UAE?
      Where repair and maintenance services are physically provided in the UAE in relation to motor vehicles, such services are subject to VAT at the standard rate, even if the costs are charged to an entity based outside the UAE

Why choose Spectrum Auditing?

Spectrum Auditing team is well equipped toadvise and take care of your requirements of Value Added Tax (VAT). Our passion and heart lie in serving the clients and we aim to keep client’s satisfaction as our primary motto. We are registered Auditors under the Ministry of Economy UAE and also registered Tax Agent from Federal Tax Agency UAE, Dubai providing dedicated Audit, Accounting, Tax services, Financial Advisory and Business Advisory Services complying regulatory requirements.

Reach us to have a frills free life in your journey in UAE. We at Spectrum will assist you in taking care of all the procedures involved in the VAT process. Call us today for any kind of assistance at +971 4 2699329 or email us at info@spectrumaccounts.com to get all your queries addressed. Spectrum is your partner in your success.

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