The Profit Margin Scheme is an option for businesses in which they can choose to calculate tax based on the profit they make from a sale rather than the total sale value. It is a mechanism of VAT calculation for taxable persons in dealing with eligible goods. Profit margin (PM) is calculated as the difference between the Selling Price (SP) of the goods and the Purchase Price (PP) of the goods. The profit margin already includes the tax. The formula for the profit margin scheme is as follows:
Tax Amount (TA) = (PM * Tax Rate) / (100 + Tax Rate)
Where: TA is the Tax Amount, PM is the Profit Margin, and the Tax Rate is applicable. VAT tax rate of 5%.
This scheme applies to certain specified goods, and certain conditions must be fulfilled to supply goods under the Profit Margin Scheme.
List of the Eligible Goods for Profit Margin Scheme in UAE
According to the special rules in Article 29 of the Executive Regulations, there are clear instructions on calculating VAT correctly when selling goods under the Profit Margin Scheme. Eligible goods under this scheme are:
1. Second-hand Goods:
These are the things or goods you can still use as they are or after fixing them.
2. Antiques-Goods
The things, items, and goods that are more than 50 years old.
3. Collectors’ items
The items are like stamps, coins, money, and other interesting things because they’re related to science, history, or archaeology.
How Profit Margin Scheme is Implemented:
The profit margin scheme is introduced for all the above-listed Goods. Still, most items that qualify for the profit margin scheme are second-hand goods. The Profit Margin Scheme is used because the tax was already added when the items were first sold.
It’s mainly used when registered second-hand goods sellers buy things from regular people who don’t pay taxes. In this case, no tax can be refunded to the second-hand seller.
So, when they sell these second-hand items, they only need to pay tax on the money they make as a profit. The profit margin scheme proves advantageous in this scenario, allowing sellers to pay taxes on the profit derived from their sales solely.
Calculation of Profit Margin Scheme in UAE
Imagine Dealer-X, who sells used cars and has a VAT registration. Dealer-X buys a used car from Consumer-A for AED 10,000. After fixing it up, Dealer-X sells the car to Consumer-B for AED 15,000. This means Dealer-X made a profit of AED 5,000.
Now, when it comes to paying taxes, they don’t have to pay tax on the complete AED 15,000. Instead, they only pay tax on their profit, which is AED 5,000. So, with a 5% VAT rate, the tax amount is AED 238, as calculated using this formula:
Tax Amount (TA) = (Profit Margin * Tax Rate) / (100 + Tax Rate)
Tax Amount (TA) = (Profit Margin * Tax Rate) 5000*5% = 250AED
According to the formula:
Tax Amount is AED 238 with a VAT tax percentage of 5%.
When You Are Able to Charge VAT On Profit Margin Based On The Profit Margin Scheme?
The profit margin scheme allows for selling goods previously subject to VAT. However, it’s important to note that certain goods purchased before January 1, 2018, are not eligible for the profit margin scheme. For these goods, VAT is due on the total selling price.
To make this clear, let’s consider two scenarios:
| Date of Purchase | VAT Applicability on the Original Purchase | Eligible for Profit Margin Scheme |
| 30 December, 2017 | No | No |
| 1st January, 2018 | Yes | Yes |
This table provides a straightforward way to determine whether goods are eligible for the profit margin scheme based on their purchase date and VAT history.
Did The Profit Margin Scheme Apply To Any Supplies Made During The Tax Period?
According to Article 29 in the Executive Regulation related to the UAE VAT Decree-Law, the profit margin scheme applies only to specific items that have been officially notified. These eligible items include second-hand products, antique items, and collector’s pieces. To qualify for the profit margin scheme, these goods must have been subject to VAT before they are sold under this scheme. In simpler terms, these items must have had VAT applied to them before they can be sold under the profit margin scheme.
Please be aware that items that were acquired prior to January 1, 2018, cannot be offered for sale utilizing the profit margin scheme.VAT must be applied to the selling price if such goods are sold.
How Can Now Consultant Help?
Evaluate product eligibility and meet the criteria of the Profit Margin Scheme with Now Consultant VAT expert team verify documentation compliance and get advice on the UAE’s VAT regulations, consult Now Consultant, offering efficient tax services, including VAT registration, return filing, reconsideration, and deregistration.
FAQs:
What Occurs If Goods are Purchased From a Person Registered for VAT?
To lie under a profit margin scheme, a taxable person or a business registered for VAT must already integrate the profit margin scheme into their operations, specific implications and considerations come into play. According to Article 29 of the Executive Regulations of the UAE VAT Decree-Law, a registered person must maintain specific records of the profit margin scheme.
When To Charge VAT Based On a Profit Margin Scheme?
In the UAE, a taxable or registered dealer can charge VAT following a profit margin scheme to its customers at the point of sale.
