VAT on Profit Margin Scheme in UAE

Profit Margin Scheme

There is a recent public clarification (VATP002) regarding profit margin scheme for Value Added Tax (VAT) in the United Arab Emirates – UAE

Normally, a taxable person charges 5% VAT on supplies he makes during ordinary course of business but in profit margin scheme “the tax is the difference between the amount paid for an item and the price is sold for” (VAT on profit margin earned instead of original selling price).

In short profit margin scheme is a Value added Tax scheme that is only applicable on Second-hand-goods on which VAT has already been applied and Paid on its first supply.

Goods that fall under profit margin scheme:

1. Second-hand goods – Tangible movable property which is suitable for further use as it is, or after repair
2. Work of Art – Historical or archaeological interest
3. Antiques – Goods which are 50 years old or more
4. Collectors’ items – Coins, Stamps, Currency

Eligibility Conditions for the profit margin scheme

There are certain conditions to be fulfilled by a taxable person for the above eligible goods:

1. The goods must have purchased from a un-registered taxable person
2. The taxable person Supplier of the goods already using the profit margin scheme and ;
3. The input tax is not recovered under article 53 of Cabinet Decision No. 52 of 2017 UAE Vat.

Record Keeping

Where a taxable person uses the profit margin scheme must keep the following records in relation to the supplies he made

• Stock register where the details of goods purchased and sold under the profit margin scheme
• Purchase invoices showing the details of the transaction

Example

ABC Company buys cell phone for AED 1000 from a member of a public and then sold to its customer for AED 1500. The calculation will be as follow for his VAT register

Sale Price = 1500

Purchase = 1000

Profit Margin = Sale price less purchase price = (1500-1000=500)

This 500 will be VAT inclusive and the vat will be as follow;

Output VAT = 500/21*1= 23.81

Where the Input VAT will be nil (0)

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You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax.