'Eligible Goods' for Calculating VAT as per Profit Margin Scheme

The profit margin scheme allows a taxable person to calculate VAT on eligible supplies on the basis of the profit margin earned, instead of the original selling price. The profit margin is defined as the difference between the buying and selling price of an item, and is inclusive of taxes. The profit margin scheme is applicable on second-hand goods on which VAT has already been levied on the first supply.

In accordance with Federal Decree-Law No. (8) on Value Added Tax,  Federal Tax Authority (FTA) has classified goods into  three main categories for calculating Value Added Tax (VAT) on the basis of the profit margin scheme, namely:

• Second-hand goods, i.e. tangible moveable property that can be used  further as it is or after repair;
• Antiques, i.e. goods that are over 50 years old;
• Collectors’ Items, such as stamps, coins, currency and other pieces of scientific, historical or archaeological interest.

The FTA asserted that only goods which have previously been subject to VAT may be subject to the profit margin scheme. To confirm  this previous applicability of VAT on goods, following information could be used as evidence (but is not limited to):

• Information relating to the date the good was first manufactured, sold or brought into use, e.g. in the case of a car, the date the car was first registered would indicate its sale would have been subject to VAT if it was registered on a date after January 1, 2018; and
• Evidence that the supplier paid VAT on their original purchase, e.g. copy of the tax invoice

Its important to keep in mind that only those goods which have previously been subject to VAT before supply may be subject to the scheme. As a result, goods falling under the following categories are not eligible to be sold under the profit margin scheme. VAT is, therefore, due on the full selling price of these goods.

• Stock in hand of used goods that were acquired prior to the effective date of Federal Decree-Law No. (8) on VAT, or
• Goods that have not previously been subject to VAT for other reasons

A taxable person may apply the profit margin scheme to eligible goods, in the following circumstances:

• If the goods were purchased from either a person who is not registered for VAT or a Taxable Person who calculated VAT on the supply by reference to the profit margin, i.e. a VAT-registered business that already applied the profit margin scheme on the same goods; or
• The Taxable Person made a supply of goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. (52) of 2017.

A Taxable Person will not be allowed to apply the profit margin scheme in cases where they had issued a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply.

Taxable Persons are required to keep inventory and similar documents that clarify the situation of every item bought or sold, as well as purchase invoices that outline the details of items bought under the profit margin scheme. If these items were bought from an unregistered Person, the Taxable Person is required to issue a self-invoice demonstrating the purchase details.

The Federal Tax Authority concluded its statement by clarifying that if the registered business imposed tax on a certain supply using the profit margin scheme, then said business would be required to issue a tax invoice explicitly stating this fact, along with all other information that is supposed to be included in an invoice, except the tax amount.

 

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