Value Added Tax (VAT) is generally charged on the full value of goods and services. However, for businesses dealing in second-hand goods, antiques, and collector’s items and article 53 goods, charging VAT on the entire selling price can lead to tax cascading –where VAT is effectively charged multiple times on the same item.
To address this, the Federal Tax Authority (FTA) introduced the Profit Margin Scheme, a special and optional VAT mechanism that allows resellers to pay VAT only on their profit margin, rather than on the full selling price.
This article breaks down the Profit Margin Scheme, its eligibility conditions, VAT calculation method and compliance requirements based on the official FTA guidelines.
Scope of Eligibility for the Profit Margin Scheme
The Profit Margin Scheme is an Optional Special Arrangement that allows a Reseller to calculate VAT based on the Profit Margin earned rather than the full selling price of the goods. To qualify for this scheme, both the goods and the transaction must meet specific criteria.
When Does the Profit Margin Scheme Apply?
The scheme may be applied in the following cases:
- When eligible goods are purchased from a non-VAT registered person or from another VAT-registered reseller who applied the Profit Margin Scheme.
- When goods are sold for which input VAT recovery was blocked under Article 53 of the VAT Executive Regulation.
The Scheme only applies to Goods which have previously been subject to VAT.
The scheme does not apply to imported goods where import VAT is recoverable under normal VAT rules. However, it may apply where import VAT recovery was blocked under Article 53.
Resellers must notify the Federal Tax Authority (FTA) of their election to charge VAT on the Profit Margin via the VAT Return. A Reseller cannot apply the Scheme if they issue a Tax Invoice or any document that explicitly discloses the amount of VAT imposed on that supply.
Eligible Goods
To use the scheme, goods must have been previously subject to UAE VAT and fall into these categories:
- Second-Hand Goods: Tangible moveable property suitable for further use, either as it is or after repair, but it should not result in a change in the basic characteristics of the Good (e.g., used cars, mobile phones, electronic devices, or furniture). Non-usable scrap is not treated as Second-Hand Goods under the Scheme.
- Antiques: Antiques are goods that are older than 50 years, typically including artworks, furniture, and valuable physical items. The reseller must retain evidence of the age of the goods, and proof that VAT was previously imposed.
- Collectors’ Items: Collector’s items include Stamps, Coins and currency, Objects of scientific, historical, or archaeological interest. These items generally derive value from rarity and their desirability from collectors’ perspective, and appropriate documentary evidence must be maintained including proof that VAT was previously imposed.
Option to Apply the Scheme
Applying the Profit Margin Scheme is not mandatory. A reseller may choose whether to apply it for each eligible supply.
When the scheme is applied, the reseller must:
- Issue a tax invoice stating that VAT is charged under the Profit Margin Scheme
- Not disclose the VAT amount separately on the invoice
- Maintain all prescribed records
- Comply with VAT return reporting requirements
If the scheme is not applied, normal VAT rules apply, and VAT must be charged on the full selling price.
Calculating the Profit Margin and Accounting for VAT
Under this scheme, the Profit Margin is regarded as being inclusive of VAT.
The margin is the difference between the Selling Price and the Purchase Price.
- Purchase Price: Includes the cost of the good plus associated cost that form part of the cost of the Good to make it ready to be used.
- Selling Price: The total consideration received for the supply.
To extract the tax from the profit, use the following formula:
VAT = Profit Margin × 5 ÷ VAT Fraction
VAT fraction is 5/105 simplifies to 1/21, so VAT equals the profit margin divided by 21.
Goods Sold at a Loss
If goods are sold at a loss or break-even, no VAT is payable under the scheme. Losses cannot be offset against profits from other sales.
Invoicing Requirements
When applying the Profit Margin Scheme:
- The tax invoice must clearly mention “VAT charged under the Profit Margin Scheme”
- The VAT amount must not be shown separately
- All other mandatory tax invoice details must be included
If VAT is disclosed on the invoice, the scheme cannot be applied to that supply.
Record-Keeping Requirements
Resellers applying the Profit Margin Scheme must maintain sufficient records to substantiate its application. These include:
- A stock book showing details of each good purchased and sold under the scheme.
- Purchase invoices for goods purchased under the scheme.
- Where goods are purchased from a non-registrants, the reseller must maintain a self-issued invoice containing:
- Name, address and TRN of the reseller
- Name and address of the seller
- Date of purchase
- Description of the goods
- Purchase consideration
- Signature of the seller or authorised person
- Evidence that the goods were previously subject to VAT, such as the original tax invoice issued when the non-registrant acquired the goods.
VAT Return Reporting
When filing the VAT Return (VAT201):
- The reseller must indicate that the Profit Margin Scheme is applied.
- Selling price net of VAT on margin is reported in Box 1.
- VAT on the profit margin is reported in the VAT column.
- Purchase price is reported in Box 9, with no VAT reported in the “VAT Amount” column.
- Top of Form
- Bottom of Form
Conclusion
The Profit Margin Scheme under UAE VAT is a valuable mechanism for resellers dealing in second-hand goods, antiques, collector’s items, and Article 53 goods. By taxing only the actual profit margin, the scheme ensures fair taxation, prevents VAT cascading, and aligns VAT liability with true economic value addition.
Need Professional Assistance? Connect with RVG
With a strong understanding of UAE VAT regulations and practical implementation, RVG supports businesses in applying the Profit Margin Scheme accurately and in line with Federal Tax Authority requirements.
