UAE VAT: Profit Margin Scheme I Tax on Second Hand Moveable Goods I Tax on second hand Car etc.

The profit margin scheme is a VAT accounting approach primarily designed for second-hand goods, antiques, and specific other items. With this scheme, VAT is applied only to the profit generated from the sale of the goods, rather than the entire selling price. This arrangement benefits sellers by lowering their VAT liability, enabling them to offer savings to customers.
The profit margin is defined as the difference between the purchase price and the selling price of the goods, and it is assumed to be VAT inclusive. The VAT amount is calculated by multiplying the profit margin by the tax rate and then dividing that result by one hundred plus the VAT rate. For instance, this can be represented as (Profit Margin * 5 / 105).
Article 43 of the UAE Corporate Tax Law states that a registrant may calculate and charge tax during any tax period based on the profit margin earned from taxable supplies, as outlined in the law's executive regulations.
Article 29 of the VAT Executive Regulations (the regulations) states that a taxable person may apply the profit margin scheme when purchasing movable second-hand goods, such as cars that can be used as it is or after repair, antiques over 50 years old, and collectibles like stamps, coins, currency, and other items of scientific, historical, or archaeological significance. This is applicable when buying eligible goods from an unregistered seller or a seller who is using the profit margin scheme, provided that these goods have already been taxed in the UAE.
This requirement clearly highlights two key points. First, the scheme applies only to specific goods that have already been taxed in the UAE. Second, it is relevant when the seller is either an unregistered person or someone selling the goods under the profit margin scheme.
The law's fundamental requirement stipulates that the seller must be a VAT unregistered person for the registered buyer to apply the profit margin scheme. If the goods are purchased from a registered seller, the profit margin scheme cannot be used, regardless of whether the goods have already been taxed in the UAE.
The law also requires that the goods must have already been taxed in the UAE. This means that if an unregistered seller is selling goods purchased before the law's effective date, the profit margin scheme cannot be applied.
The profit margin scheme is an optional scheme. If the buyer chooses not to apply the PMS, they may struggle to remain competitive in the market.
The PMS can be applied, if the goods are being bought from the seller who is already applying the PMS.
When the PMS is applied, the buyer cannot claim input tax, as they will not receive a tax invoice from the seller that explicitly states the amount of VAT.
Where the eligible goods are being bought from unregistered seller, the registered buyer is liable to issue an invoice that includes specific details about the transaction. This invoice must contain the name, address, and Tax Registration Number (TRN) of the taxable person, as well as the name and address of the seller. Additionally, it should include the date of purchase, a description of the goods acquired, the consideration payable for those goods, and the signature of the person selling them.
The VAT registered buyer is required to maintain specific records to ensure compliance with the profit margin scheme. This includes keeping a stock book or a similar record that details each good purchased and sold under the scheme. Additionally, the taxable person must retain purchase invoices that provide information about the goods acquired under the profit margin scheme. These records are essential for accurate reporting and verification of transactions.
The VAT-registered buyer of eligible goods will issue a tax invoice that lists the full value of the goods without specifying the VAT amount. This sales price will be considered VAT-inclusive, and the seller must include the statement “VAT was charged with reference to the profit margin scheme” on the invoice, along with all other contents of the invoice as outlined in Article 59 of the law.
When reporting in the tax return, the purchase will be entered in Box 9 without any corresponding input tax amount. The sales figure (exclusive of VAT) will be reported in Box 1, with the related output tax recorded in the designated box Infront of the sales. For example, if a car was purchased for AED 100,000 and sold for AED 150,000, AED 100,000 will be reported in Box 9 with no input tax. The output tax amount of AED 2,380.95, calculated as [(150,000 - 100,000) * 5/105], will be reported as output tax in front of corresponding Box No.1. The net sales amount of AED 147,619.05 (calculated as 150,000 - 2,380.95) will be recorded in Box 1 for the respective Emirates.
When applying the profit margin scheme, the taxable person must notify the FTA at the time of submitting the return by selecting the appropriate box.