Profit Margin Scheme Under VAT in UAE
Under UAE VAT law, normally VAT is calculated on the sales value. As an exception to that, the Federal Tax Authority (FTA) in the UAE has given an option to the Taxable person to pay VAT on the profit margin earned on the taxable supplies made which is known as Profit Margin Scheme.
What is Profit Margin Scheme Under VAT in UAE?
As per Article 43 of UAE VAT Decree-law, Profit Margin Scheme under VAT in UAE is a mechanism under which the Taxable persons who are dealing with the eligible goods notified by UAE VAT Law can calculate and pay VAT to the FTA on the profit margin earned. Profit margin means it is the difference between the Purchase Price of the goods and the Selling price of the goods. The profit margin earned shall be treated as inclusive of Tax. If there is no profit margin for e.g.
if the purchase price is more than the selling price, then the value of the supply is zero for VAT purposes. It is the responsibility of the Tax Registrant to notify the Federal Tax Authority if the profit margin scheme under VAT in UAE is applied in their business. As per Article 76 of the Decree-Law, the Authority has the right to issue an Administrative Penalty Assessment to the Taxable person if he fails to notice that Tax is applied based on the profit margin scheme.
For a more detailed explanation, the Authority has released a Public Clarification (VATP002) on profit margin scheme under VAT in UAE which will helps us to understand the scheme in detail.
What are the Eligible goods for Profit Margin Scheme Under VAT in UAE?
As per Article 29 of the Executive Regulation to UAE VAT Decree-Law, the following are those goods which can be supplied under profit margin scheme:
- Second-hand goods - a tangible moveable property that is suitable for further use as it is or after repair.
- Antiques – goods that are over 50 years old.
- Collector’s items – stamps, coins, currency, and other pieces of scientific, historical, or archaeological interest.
When can Profit Margin Scheme Under VAT in UAE Be Applicable?
A VAT registrant in the UAE may apply the profit margin scheme only if the following conditions are fulfilled:
- The goods must be purchased from either:
- A person who is not registered for VAT or
- A Taxable person or a VAT registered business that has already adopted a profit margin scheme in the business.
- The Taxable person should not have recovered input tax as per the regulations of Article 53 of the Executive Regulation.
Can Profit Margin Scheme Under VAT in UAE Be Applicable To Goods Purchased Prior to the introduction of VAT in UAE?
As already mentioned above, this scheme can be applied only if the goods which are eligible to be sold under the Profit Margin Scheme were subject to tax earlier. Also, it is clarified by the FTA that Profit Margin Scheme cannot be applied for those goods for which VAT was not charged previously or goods which are bought before the implementation of VAT in the UAE i.e. before 1st Jan 2018. The below scenarios will help you to understand when the Profit Margin Scheme can be applied:
| SL NO |
Scenario |
Applicability |
| 1 |
If the goods were purchased prior to 1st Jan 2018 and the original purchase was not subject to VAT |
Profit Margin Scheme cannot be applied, and the supply of goods will be subject to 5% VAT. |
| 2 |
If the goods were purchased on or after 2018 from an unregistered supplier and the goods may have been purchased prior to 1st Jan 2018. |
The supply will be subject to 5% VAT unless there should be evidence to prove that the goods had been subject to VAT earlier. |
| 3 |
If the goods were purchased from a supplier after 1st Jan 2018 and it was known that the supplier purchased those goods after 1st Jan 2018. |
Profit Margin Scheme can be applied but there should be valid evidence to prove that the goods were subject to VAT on an earlier supply. |
What documents are required to apply for Profit Margin Scheme under VAT in UAE?
A Taxable person is required to keep the following records in order to apply for the Profit Margin Scheme in the business:
- A stock book or similar document to prove the details of all the goods purchased and sold under the profit margin scheme.
- Copy of purchase invoices showing the details of goods purchased under this scheme. If the Taxable person has purchased the goods from a Nonregistrant, there will not be an invoice to prove the supply. In that case, the Taxable person must issue an invoice to himself, which should contain at least the following information:
- The name, address and Tax Registration Number of the Taxable person
- The name and address of the person selling the goods
- The date of the purchase
- Details of the good purchased
- The consideration payable in respect of the goods
- Signature of the person selling the good or Authorized Signatory.
- In order to prove that good was subject to tax previously, the Taxable person must ask the supplier a copy of the Tax invoice relating to their purchase of the good.
Practical Examples for Profit Margin Scheme Under VAT in UAE
Q1.
Mr A, a VAT registrant is dealt with within the business of selling antique furniture. He bought antique furniture from Mr B, a non-registrant costing AED 500. Mr A sold the same furniture to Ms Z for AED 1000. Calculate the Output VAT and Input VAT to be declared in the VAT return of Mr A.
Answer: Purchase Price = AED 500
Selling Price = AED 1000
Profit margin earned = AED 500
Output VAT = 500/1.05*0.05 = AED 23.81
Input VAT = zero, as Mr A purchased from a non-registrant.
Q2.
Mr A, a VAT registrant bought an antique vase from Mr B, who is not VAT registered. Mr A later sold the vase for a profit to Ms C, an individual. State in which all cases, a tax invoice is required, and if so, who is responsible for producing the invoice.
Answer: Invoice is required for both purchase and sale transaction and it is the responsibility of Mr A to issue Tax Invoice for both transactions. Since Mr A bought the vase from Mr B a non-registrant, he is liable to issue a Tax invoice to himself including all the details mentioned above. Also, while selling the vase on a profit to Ms C, a Tax Invoice is required and it should clearly state that the Tax was charged with reference to the profit margin along with all other information without the VAT amount being mentioned in the invoice as the margin earned is inclusive of VAT.
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