The Profit Margin Scheme is a special VAT arrangement in the UAE that allows you to pay VAT only on your profit, not on the full selling price of an item. When applied correctly, it prevents multiple layers of VAT on the same goods and ensures fair taxation.
What is the Profit Margin Scheme in UAE VAT?
Under normal VAT in UAE rules, you charge 5% on the total selling price of goods. The Profit Margin Scheme works differently.
How is VAT calculated under the Profit Margin Scheme?
When you apply this scheme, VAT is calculated only on the profit margin, which is the difference between:
What you paid for the item, and
What you sold it for
The main purpose is to avoid cascading VAT, where the same value gets taxed multiple times when goods are resold.
The most important thing about the Profit Margin Scheme is that the item(s) in question should have been subject to UAE VAT at some point in the past. Items purchased before 1 January 2018, when VAT did not exist in the UAE, are not eligible for the Profit Margin Scheme.
Business owners should also consider how the Profit Margin Scheme affects your overall tax compliance, especially alongside Corporate Tax in UAE, where profits should be reported accurately.
When to Use the Profit Margin Scheme in UAE?
- The Profit Margin Scheme is optional. You can use the scheme if you are a VAT-registered business selling:
- Second-hand goods: Tangible items that can be reused like used cars and mobile phones.
- Antiques: Items over 50 years old.
- Collectors’ items: Items like stamps, coins, goods of scientific or historic interest.
- Article 53 goods: Items where you were legally blocked from recovering the initial VAT, such as certain motor vehicles.
How to Calculate VAT Under the Profit Margin Scheme
This is how the Profit Margin Scheme under VAT in UAE calculation works:
Step 1: Calculate the Profit Margin
Profit Margin = Selling price – Purchase price
- Purchase price: Includes the cost of the item plus any transport or installation fees.
- Selling price: Total amount you receive when you sell the item.
Step 2: Calculate the VAT
The profit margin is treated as inclusive of VAT. You calculate VAT using the VAT fraction (5/105):
VAT = Profit Margin ÷ 21
If you sell an item at a loss, no VAT is due on that sale. However, you cannot use that loss to reduce VAT payable on other profitable sales.
What are the Rules for Using the Profit Margin Scheme?
1. Invoicing rules
Your tax invoice must clearly state that VAT was charged based on the Profit Margin Scheme. You shouldn’t show the VAT amount separately on the invoice.2. Proof of previous VAT
You must keep evidence that the item was previously subject to UAE VAT. This usually includes the original invoice from the previous owner.3. Keep records
You have to maintain a stock book that records every item purchased and sold under the scheme. Record keeping is essential under this scheme, so you may need professional accounting services in Dubai to stay fully VAT compliant.How to Report the Profit Margin Scheme in Your VAT Return
On your VAT return (Form 201), you must select “Yes” for the question confirming whether you applied the Profit Margin Scheme during the tax period.
VAT Return Box 1
- Report the selling price minus the VAT in the “Amount” column.
- Report the VAT on the profit margin in the “VAT Amount” column.
VAT Return Box 9
- Report the purchase price in the “Amount” column for the period in which you bought the item.
- Leave the “VAT Amount” column as zero.
If you need help figuring out how the Profit Margin Scheme works under VAT, A&A Associate can help. Our tax experts can help you assess your eligibility and correctly apply the Profit Margin Scheme to your goods.
