🥇 Profit Margin Scheme under VAT in UAE Explained
Introduction to Profit Margin Scheme
Profit margin scheme under VAT in UAE is a special way to calculate tax. Instead of charging VAT on the full sales price, VAT is applied only on the profit earned. This method prevents double taxation on second-hand goods, antiques, collectibles, and artworks.
When a business buys second-hand goods from a non-registered seller, it doesn’t pay VAT on purchase. So, when reselling, the dealer applies VAT only on profit and not on total sales. That’s why the scheme is useful for dealers who deal in used products. Professional consultants like Mubarak Al Ketbi (MAK) Auditing help companies apply this scheme correctly while filing VAT returns.
Goods Covered under Profit Margin Scheme
The Federal Tax Authority (FTA) has outlined the goods eligible under this scheme. These include:
- Second-hand goods – Tangible movable property that can still be used.
- Works of Art – Paintings, sculptures, and items of cultural or historic value.
- Antiques – Products more than 50 years old.
- Collectors’ items – Stamps, coins, and rare currencies.
FTA clarified that this scheme can’t be applied if VAT was never charged on goods (like items bought before VAT started in 2018).
Eligibility Conditions for Profit Margin Scheme
For a business to apply this scheme, it must meet specific conditions:
- Goods must be purchased from a non-registered person.
- Dealer must officially opt for the profit margin scheme.
- Input tax must not be claimed on these goods.
When these conditions are met, VAT is calculated only on the margin of sale.
When Can You Apply the Scheme?
Businesses should check these points before applying the scheme:
- Goods purchased before 1st January 2018
- Profit margin scheme doesn’t apply. VAT is charged on full price.
- Goods purchased after 1st January 2018 from a non-registered supplier
- VAT can’t be applied unless proof shows VAT was already charged in earlier supply.
- Goods purchased after 1st January 2018 from a registered supplier
- Scheme applies if proof confirms VAT was charged in earlier transactions.
How Does the Scheme Work?
The formula for calculating VAT under this scheme is simple.
Profit Margin = Sales Price – Purchase Price
VAT is charged only on that margin, not on total sales.
Example:
- Dealer buys goods at AED 2,000.
- Dealer sells goods at AED 9,000.
- Profit margin = AED 7,000.
- VAT rate = 5%.
- Output tax = (7,000 × 5) ÷ (100 + 5) = AED 333.33.
In this case, no input tax is allowed. VAT is collected only on AED 7,000, not on AED 9,000.
Advantages of Profit Margin Scheme
Businesses gain many benefits by applying this scheme:
- Avoid double taxation.
- Reduce tax liability.
- Encourage trade in second-hand products.
- Make antiques, collectibles, and artworks more marketable.
- Simplify VAT calculation for dealers.
Common Challenges Businesses Face
Many companies struggle to decide when to apply this scheme. Some issues include:
- Confusion about proof of earlier VAT payment.
- Incorrect classification of goods.
- Errors in VAT filing and record keeping.
This is why consulting experts like Mubarak Al Ketbi (MAK) Auditing helps ensure compliance with UAE VAT laws.
🥇 What Can Help – Mubarak Al Ketbi (MAK) Auditing
Profit margin scheme is complex, but it helps businesses save tax when applied correctly. Mubarak Al Ketbi (MAK) Auditing offers VAT consultancy, compliance checks, and return filing support to guide companies. Remember, don’t bite off more than you can chew—get expert help before mistakes cost you.
For more information visit our office:
- 📍 Saraya Avenue Building – Office M-06, Block/A, Al Garhoud – Dubai – United Arab Emirates
- 📞 Contact/WhatsApp: +971 50 276 2132
