The UAE Federal Tax Authority (FTA) has released a detailed Profit Margin Scheme Guide (VATGPM1), offering long-awaited clarity on how Value Added Tax (VAT) should be calculated on the resale of certain goods. This guide is a significant development for businesses involved in the trading, resale, or disposal of used assets and restricted goods.
The Profit Margin Scheme is designed to prevent VAT cascading—a situation where VAT is charged multiple times on the same goods—thereby reducing the overall VAT burden on businesses and ensuring fair taxation.
What Is the Profit Margin Scheme?
Under the Profit Margin Scheme, VAT is calculated only on the profit margin (the difference between the selling price and the purchase price), rather than on the full selling price of the goods.
This approach is particularly beneficial where:
- VAT has already been charged earlier in the supply chain, or
- Input VAT was not recoverable at the time of purchase.
The scheme ensures that businesses are not unfairly taxed again on the same value.
Goods Covered Under the Profit Margin Scheme
According to the new FTA guide, the scheme can be applied to the resale of the following goods:
- Second-hand goods
- Antiques
- Collectors’ items
- Goods where input VAT recovery was blocked under Article 53, such as:
- Vehicles made available for employees’ personal use
- Certain entertainment-related assets
This makes the update especially relevant for businesses dealing in used vehicles, machinery, equipment, or asset disposals.
How VAT Is Calculated Under the Scheme
Instead of charging VAT on the full selling price, VAT is calculated as follows:
VAT = Profit Margin × 5%
If there is no profit, or if the goods are sold at a loss, no VAT is payable.
This mechanism significantly reduces the VAT cost for businesses compared to standard VAT treatment.
Key Conditions and Compliance Requirements
While the Profit Margin Scheme is optional, businesses must strictly meet FTA conditions to apply it:
1. Proof That Goods Were Previously Subject to VAT
Businesses must retain documentary evidence showing that VAT was incurred earlier or that input VAT recovery was blocked.
2. Special Invoicing Rules
- VAT must not be shown separately on the tax invoice
- The invoice should clearly state that the Profit Margin Scheme has been applied
3. Record-Keeping Obligations
Businesses must maintain detailed records, including:
- Purchase and selling prices
- Profit margin calculations
- Supporting documents for VAT treatment
4. Correct VAT Return Reporting
Transactions under the scheme must be correctly reported in VAT returns as per FTA instructions.
Failure to meet these requirements may result in penalties or rejection of the scheme’s application.
Why This Update Matters for Businesses
This guide is particularly important for:
- Businesses dealing in used assets or resale activities
- Companies disposing of Article 53 restricted goods
- Automotive dealers, equipment resellers, and trading companies
- Businesses looking to optimize VAT costs while remaining compliant
By applying the Profit Margin Scheme correctly, businesses can significantly reduce their VAT liability without breaching FTA regulations.
How Capital Zone Can Help
Understanding and implementing the Profit Margin Scheme requires careful analysis and accurate documentation. At Capital Zone Accounting & Bookkeeping, we help businesses:
- Assess eligibility for the Profit Margin Scheme
- Review past and future transactions
- Ensure correct invoicing and record-keeping
- Apply the scheme in VAT returns accurately
- Stay fully compliant with FTA guidelines
📄 Download the Official FTA Guide
[Profit Margin Scheme – Value Added Tax Guide | VATGPM1]
(Open/Download)
📞 Need expert guidance on VAT compliance or applying the Profit Margin Scheme?
Contact The Capital Zone Accounting & Bookkeeping today and let our VAT specialists support you with clarity and confidence.
