The Profit Margin Scheme under VAT in UAE is applicable to a specific set of goods and not on services. The scheme was proposed for calculation of VAT for certain items, including second-hand goods. A set of conditions needs to be fulfilled by businesses in the UAE to be eligible to apply the Profit Margin Scheme to their taxable supplies. Continue reading to know more about this scheme.
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VAT Profit Margin Scheme in UAE
In order to ease the VAT calculation on certain goods, the FTA has introduced the Profit Margin Scheme which allows a registered business/person to calculate tax on eligible supplies on the basis of the profit margin rather than the original sale value. Here’s how it works.
When selling a second-hand item, such as a car, the registered seller will only have to pay VAT on the profit he/she makes on the supply. Suppose that he purchased the secondhand car for Dh30,000, spend Dh1,000 on repairs and then sold the car for Dh35,000. So, the profit will be Dh4,000 and the VAT shall be applicable to only this amount.
Availability of the Profit Margin Scheme
The Profit Margin Scheme is applicable only to the supply of certain good and not on services. Here’s the list of goods on which the Profit Margin Scheme is available.
1. Second-hand goods – Items sold for re-use
2. Antiques – Old items, 50 years old or more
3. Collection items, such as currency, coins, and stamps
Purpose of the Profit Margin Scheme
The basic purpose of the scheme is to avoid the double taxation on second-hand goods. Most of the goods covered under the Profit Margin Scheme are second-hand ones, on which tax has probably already been paid.
When the dealer/buyer purchases from an unregistered supplier, he doesn’t pay tax, so there is no input tax to recover. Therefore, while selling these second-hand goods, the dealer shouldn’t have to pay tax on the full sale price, since a tax has already been paid on these items. This is where the Profit Margin Scheme is beneficial by allowing the sellers to pay VAT only on the profit made in the sale.
Note: However, if the registered dealer is purchasing a second-hand item from another registered person, he/she will pay tax on this supply. The input tax can be recovered only if the dealer does not opt for the margin scheme. If he does, he cannot claim a credit of the input tax.
Eligibility Conditions for the Profit Margin Scheme
In order to be eligible for this Scheme, the supply of goods must fulfill the following conditions:
The goods must be purchased from either an unregistered (VAT) person or a VAT registered person who is selling the goods under the scheme.
Input tax should not be claimed for the supplies made under this scheme.
A registered person making supplies under the Profit Margin Scheme need not notify the FTA for the same, however, he/she is required to report the sales along with VAT levied on such sales under the Scheme while filing their VAT returns.