Taxable persons or entities in the UAE calculate VAT on the original selling price in normal conditions. However, there are situations where the Federal Tax Authority (FTA) allows the calculation of VAT on the profit instead of the sales value, which is called the Profit Margin Scheme. The Profit Margin Scheme under UAE VAT is an optional mechanism and the methods apply to a select type of goods under specific situations. Profit margin can be defined as the difference between the purchase price and the selling price of the good.
According to the Article 43 of the UAE VAT Decree-Law, a VAT registrant, in any Tax period, is eligible to calculate and charge Tax based on the profit margin earned on the Taxable Supplies and is also required to notify the FTA of the same. A taxable entity may choose the profit margin scheme if it meets all the required conditions as per VAT in UAE. The taxpayers can also avail the services of registered tax agents in Dubai, UAE for further clarification and assistance.
Eligibility for the Profit Margin Scheme under UAE VAT
As per Article 29 of the Executive Regulations of UAE VAT Decree-Law only certain types of goods are eligible for the profit margin scheme under VAT in the UAE. They are
a) Second-Hand Goods
Second-hand goods are tangible moveable property that is suitable for further use as it is or after repair.
The goods that are more than 50 years old are considered as Antiques as per the Executive Regulations of UAE VAT Decree-Law.
c) Collectors’ Items
Collectors’ items refer to goods such as stamps, coins, currency and other pieces of scientific, historical or archaeological interest.
Conditions to Apply the Profit Margin Scheme
Businesses that are registered under UAE VAT are eligible to apply the profit margin scheme under the following conditions:
- The goods should be purchased from either a person who has not registered for VAT in the UAE or a taxable person who calculated VAT on the supply by reference to the profit margin i.e. a VAT registered business which already applied the profit margin scheme on the same goods.
- Where the input tax on the purchase of such goods was not recovered by a taxable person under Article 53 of the VAT Executive Regulations.
However, the UAE VAT Law doesn’t allow a taxable person to apply the profit margin scheme in situations where he has issued a tax invoice or any document that specify the amount of VAT chargeable in respect of the supply. Consult with the best tax agents in Dubai, UAE to properly apply the profit margin scheme.
Goods Purchased Before the Introduction of VAT in the UAE
Since the profit margin scheme is plied on second-hand goods, antiques and collectors’ items, a common doubt arise if the profit margin scheme can be applied to the goods acquired before the introduction of VAT in January 2018. To clear the air on such an issue the FTA issued a public clarification and as per the clarification, goods that have been previously subject to VAT before the supply in question are eligible for profit margin scheme. Therefore, stock on hand of used goods that were bought before the Federal Decree-Law No. (8) on Value Added Tax came into effect or goods that have not been previously subject to VAT for any other reason are not eligible to be sold under the profit margin scheme.
Record-Keeping Requirements as per the Profit Margin Scheme
A taxable person is required to keep certain records as per Article 29 of the Executive Regulations of UAE VAT Decree-Law. The records to be kept under the profit margin scheme are:
- A stock book or an equivalent record that demonstrate the specifics of each Good purchased and sold under the profit margin scheme
- Purchase invoices that show details of goods purchased under the scheme
If the goods are purchased from unregistered persons the taxable person himself should issue an invoice that shows the specifics of the Goods and it must include the following details:
(a) Name, Address & Tax Registration Number of Taxable Person
(b) Name & address of the person selling the good
(c) Date in which the purchase was made
(d) Details of the purchased goods
(e) Consideration payable in respect of goods
(f) Signature of the person who sells the goods or an authorised signatory
The persons eligible to apply profit margin scheme are required to follow the guidelines in respect of the record-keeping requirements. However, if the process appears to be tough, then they can avail the assistance of registered tax agents in Dubai, UAE.
What Do Businesses Need to Do?
The FTA’s public clarification states that a supplier should be sure that the goods were previously subjected to VAT to apply the profit margin scheme. Evidence should be provided to show that the goods were previously subject to VAT in the UAE. Tax agents in Dubai, UAE can be consulted for expert advice on what evidence needs to be provided to show the goods were previously subject to VAT. This evidence may include but not limited to
- Specifics about the date on which the good was first manufactured
- Evidence to show supplier paid VAT on the original purchase of the good
Hire Registered Tax Agents in Dubai, UAE
The profit margin scheme is an optional method in which the VAT can be calculated on the profit margin instead of the sales value. However, the taxpayers need to go through the relevant laws to confirm their eligibility for the profit margin scheme. Since there are conditions and requirements for the application of the profit margin scheme, the taxable entities require the expert advice of the best VAT consultants in Dubai, UAE such as Jitendra Chartered Accountants (JCA).
JCA’s team of VAT specialists and registered tax agents in Dubai guide the businesses through the intricacies of the UAE VAT Law and ensure that they comply with the regulations and requirements. JCA provides efficient tax services in Dubai including VAT registration, VAT return filing, VAT reconsideration, VAT deregistration etc. JCA imparts robust solutions to all VAT and excise tax-related issued of the businesses on the back of impeccable experience in serving thousands of companies from a wide range of industries in the UAE and GCC.