VAT Profit Margin Scheme

What is Profit Margin Scheme?

The Profit Margin Scheme allows (VAT Profit Margin Scheme in The United Arab Emirates) that, in certain cases, Registrant may calculate and charge VAT on the Profit Margin earned rather than the full value.

Are there any Conditions to avail Profit Margin Scheme?

Yes, there is only one condition to charge VAT under this Scheme which is:

The Goods are purchased from a Non-VAT registered supplier OR purchased from a registered supplier who accounted for Tax on the supply by reference to Profit Margin.

What type of Goods falls under Profit Margin scheme?

The following type of Goods:

  1. Second Hand / Used Goods; i.e. tangible movable goods like Cars and Households.
  2. Antiques; i.e. Goods which are over 50 years old.
  3. Collector’s Items; i.e. Stamps, Coins and currency and other pieces of scientific, historical or archaeological interest.

Why is the Profit Margin Scheme needed? (Illustrative Explanation)

Many businesses trade in second-hand goods. They purchase those goods from a non VAT registered individual and will also sell them to a non VAT registered individual.

Assuming a person is a VAT registered second hand household items dealer who wants to buy an item of the household for AED 5,000 from a non VAT registered private individual and then sell it on for AED 5,250 to another non VAT registered private individual.

There would be no VAT to recover on the purchase and so the cost would be AED 5,250. However on the sale, in the absence of profit margin scheme, the AED 5,250 charged would actually be AED 5,000 + AED 250 (5%) VAT.

The AED 250 VAT charged by the person would have to be paid over to FTA and so although the buyer had paid AED 5,250 for the item (he isn’t VAT registered and so can’t recover the VAT you’ve charged him) you will only have received AED 5,000 and so made no profit.

How does the Profit Margin Scheme help?

Continuing the same illustration as above, if the person qualified for and applied the margin scheme to this transaction than the VAT payable would only be the difference between the amount you bought the item for and the amount you sold it for.

Therefore the person would buy at AED 5,000 and sell at 5,250 but the VAT-able sale declared to FTA would be:

AED 250 would need to be paid over to HMRC leaving you with a profit of AED 237.50

Is there any Specific Record to be kept by Registered Person under this scheme?

Under this Scheme Tax Registered Person is required to keep records of the following:

  1. Stock Book
  2. Purchase Invoice (If not obtained the Tax registered Person must issue himself).
  3. Sales Tax Invoice

Read More VAT Refund Scheme for Business Visitors in UAE