UAE VAT: Profit Margin Scheme

The profit margin scheme is a VAT accounting approach primarily designed for second-hand goods, antiques, and specific other items. With this scheme, VAT is applied only to the profit generated from the sale of the goods, rather than the entire selling price. This arrangement benefits sellers by lowering their VAT liability, enabling them to offer savings to customers.

The profit margin is defined as the difference between the purchase price and the selling price of the goods, and it is assumed to be VAT inclusive. The VAT amount is calculated by multiplying the profit margin by the tax rate and then dividing that result by one hundred plus the VAT rate. For instance, this can be represented as (Profit Margin * 5 / 105).

The profit margin scheme offers several core benefits for businesses dealing in second-hand goods. Firstly, it significantly reduces VAT liability, as VAT is charged only on the profit margin, which lowers the overall tax owed. This reduction translates into cost savings for buyers, enabling sellers to provide more competitive prices. Additionally, the scheme simplifies accounting processes, making VAT management easier for businesses. It also encourages sustainability by promoting the resale of used goods, thereby reducing waste. Finally, with lower VAT payments, businesses can enjoy improved cash flow, providing greater financial flexibility for reinvestment. Overall, this scheme fosters a thriving market for second-hand goods, benefiting both sellers and buyers alike.

?Article 43 of the UAE Corporate Tax Law states that a registrant may calculate and charge tax during any tax period based on the profit margin earned from taxable supplies, as outlined in the law's executive regulations.

Article 29 of the VAT Executive Regulations (the regulations) states that a taxable person may apply the profit margin scheme when purchasing movable second-hand goods, such as cars that can be used as it is or after repair, antiques over 50 years old, and collectibles like stamps, coins, currency, and other items of scientific, historical, or archaeological significance. This is applicable when buying eligible goods from an unregistered seller or a seller who is using the profit margin scheme, provided that these goods have already been taxed in the UAE.

The selling price encompasses all amounts received for the goods, whether from the buyer or a third party. This includes payments for (i) incidental expenses directly related to the sale, and (ii) accessories installed prior to the sale. However, disbursements are not included in the selling price and should be recorded separately outside the scheme.

For example, the purchase price of the item is set at Dhs 10,000. Included within the selling price are total incidental expenses amounting to Dhs 650. However, there are also in-house expenses totalling Dhs 750. The overall selling price is Dhs 12,500, and there are additional total disbursements of Dhs 200, which are also not included in the selling price. In this example, inhouse cost of Dhs 750 and disbursement of Dhs 200 will not be considered.

The third party cost of Dhs 650 will be included in the purchase price so the total purchase price is Dhs 10,650; and selling price is Dhs 12,500. The net margin is Dhs 1,850 (12,500-10,650); and net VAT payable is Dhs 88.095 (1,850*5/105).

This requirement clearly highlights two key points. First, the scheme applies only to specific goods that have already been taxed in the UAE. Second, it is relevant when the seller is either an unregistered person or someone selling the goods under the profit margin scheme.

The law's fundamental requirement stipulates that the seller must be a VAT unregistered person for the registered buyer to apply the profit margin scheme. If the goods are purchased from a registered seller, the profit margin scheme cannot be used, regardless of whether the goods have already been taxed in the UAE. Where goods are bought from registered seller, the registered seller will charge VAT, which becomes the buyer's input tax. When the buyer sells the goods, they will apply VAT on the full selling price. Consequently, the net VAT amount (output tax minus input tax) will be remitted to the FTA. For example, this could amount to AED 2,500 (calculated as 150,000 5% - 100,000 5%).

The law also requires that the goods must have already been taxed in the UAE. This means that if an unregistered seller is selling goods purchased before the law's effective date, the profit margin scheme cannot be applied. For instance, if Mr. A bought a car in 2017 and now sells it for AED 100,000 without applying VAT, the buyer cannot use the profit margin scheme for that car, as it was acquired prior to the law's effective date and has not been taxed in the UAE. Therefore, when the buyer sells the car, they must apply VAT on the full selling price of AED 150,000 and remit 5% of that amount to the FTA.

If Mr. A purchased another car in 2018 and is now selling it to a VAT-registered buyer, such as a car dealership, the dealership can apply the profit margin scheme. This is because the seller is an unregistered person and the car was taxed in the UAE in 2018 at the time of its first registration.

The profit margin scheme is optional. If the buyer chooses not to apply the PMS, they may struggle to remain competitive in the market. For example, if the buyer purchases a car for AED 100,000 from an unregistered seller, they will have no input tax to claim. When selling the car, the sales price would be AED 157,500 (AED 150,000 plus VAT), resulting in an output tax of AED 7,500 owed to the FTA. However, if the PMS is applied, the sales price would be AED 150,000, providing an advantage to sellers using the scheme. In this case, the net amount of VAT to be deposited with the FTA would be AED 2,380.95, calculated as [(AED 150,000 – AED 100,000) * 5/105].

The PMS can be applied, if the goods are being bought from the seller who is already applying the PMS.

When the PMS is applied, the buyer cannot claim input tax, as they will not receive a tax invoice from the seller that explicitly states the amount of VAT. The unregistered seller does not issue a tax invoice, and even a registered seller applying the PMS will present the full selling price on the invoice, which is assumed to be inclusive of VAT.

Where the eligible goods are being bought from unregistered seller, the registered buyer is liable to issue an invoice that includes specific details about the transaction. This invoice must contain the name, address, and Tax Registration Number (TRN) of the taxable person, as well as the name and address of the seller. Additionally, it should include the date of purchase, a description of the goods acquired, the consideration payable for those goods, and the signature of the person selling them.

The VAT registered buyer is required to maintain specific records to ensure compliance with the profit margin scheme. This includes keeping a stock book or a similar record that details each good purchased and sold under the scheme. Additionally, the taxable person must retain purchase invoices that provide information about the goods acquired under the profit margin scheme. These records are essential for accurate reporting and verification of transactions.

The VAT-registered buyer of eligible goods will issue a tax invoice that lists the full value of the goods without specifying the VAT amount. This sales price will be considered VAT-inclusive, and the seller must include the statement “VAT was charged with reference to the profit margin scheme” on the invoice, along with all other contents of the invoice as outlined in Article 59 of the law.

When reporting in the tax return, the purchase will be entered in Box 9 without any corresponding input tax amount. The sales figure (exclusive of VAT) will be reported in Box 1, with the related output tax recorded in the designated box infront of the sales. For example, if a car was purchased for AED 100,000 and sold for AED 150,000, AED 100,000 will be reported in Box 9 with no input tax. The output tax amount of AED 2,380.95, calculated as [(150,000 - 100,000) * 5/105], will be reported as output tax in front of corresponding Box No.1. The net sales amount of AED 147,619.05 (calculated as 150,000 - 2,380.95) will be recorded in Box 1 for the respective Emirates.

When applying the profit margin scheme, the taxable person must notify the FTA at the time of submitting the return by selecting the appropriate box.

Eligible businesses are advised to apply the profit margin scheme to remain competitive in the market, and they should maintain a checklist to ensure compliance with all legal requirements.

The writer, Mahar Afzal, is a managing partner at Kress Cooper Management Consultants. The above is not an official but a personal opinion. For any queries/clarifications, please feel free to contact him at?[email protected] .