UAE VAT Profit Margin Scheme: A Comprehensive Overview

The Federal Tax Authority (FTA) of the United Arab Emirates released its comprehensive guide on the Profit Margin Scheme (VATGPM1) in January 2026, providing detailed guidance on this optional special VAT arrangement for dealers in second-hand goods, antiques, and collectors' items.

Legal Framework

The Profit Margin Scheme is established under Article 43 of Federal Decree-Law No. 8 of 2017 on Value Added Tax and detailed in Article 29 of the VAT Executive Regulation (Cabinet Decision No. 52 of 2017). This scheme represents a significant relief mechanism for resellers who would otherwise face VAT cascading effects on goods that have already been subject to taxation.

Purpose and Rationale

The scheme addresses a fundamental challenge in the second-hand goods market: preventing double taxation. When a reseller purchases goods from non-registered individuals or from sellers who used the scheme, they cannot recover the VAT embedded in the purchase price. Without the Profit Margin Scheme, these dealers would be required to charge VAT on the full selling price, leading to tax cascading and competitive disadvantage.

Instead, the scheme allows registered dealers to calculate VAT only on their profit margin – the difference between purchase and selling prices – rather than on the entire sale value. This ensures that VAT is charged only on the value added by the dealer, maintaining tax neutrality.

Eligible Goods

The scheme applies exclusively to three categories of goods that must have been previously subject to VAT:

Second-Hand Goods: Tangible moveable property suitable for use as-is or after repair, such as used cars, mobile phones, electronics, and furniture. Crucially, repairs must not change the basic nature of the good. For instance, servicing a car qualifies, but converting aircraft equipment into furniture does not, as this represents a fundamental transformation creating a new good.

Antiques: Goods exceeding 50 years of age, typically including artwork, furniture, and other valuable physical items.

Collectors' Items: Stamps, coins, currency, and items of scientific, historical, or archaeological interest that command premium prices due to rarity and collector desirability.

A critical requirement is that goods must have been subject to UAE VAT at some point in the supply chain. Goods purchased before VAT implementation on January 1, 2018, or never subjected to VAT for other reasons, do not qualify. Dealers must retain documentary evidence, such as the original tax invoice showing VAT was charged, to substantiate eligibility.

Eligible Transactions

The scheme applies in two primary scenarios:

Purchases from Non-Registrants or Scheme Users: When a taxable person acquires eligible goods from individuals without Tax Registration Numbers (TRNs) or from dealers who themselves applied the scheme.

Article 53 Goods: Where input tax recovery was blocked under Article 53 of the VAT Executive Regulation, such as motor vehicles available for private use. Notably, this provision extends beyond eligible goods categories to any goods where Article 53 blocked input tax recovery.

However, the scheme does not apply to imported eligible goods where the dealer can recover import VAT under normal rules, as this would not create VAT cascading.

Calculation Methodology

The profit margin calculation is straightforward yet precise:

Profit Margin = Selling Price - Purchase Price

The purchase price includes the good's cost plus all acquisition expenses such as transport and installation. The selling price comprises all consideration received, including ancillary supplies directly linked to the sale (like necessary accessories), but excludes separate supplies such as extended warranties.

Since the profit margin is VAT-inclusive, dealers apply the VAT fraction to extract the tax component:

VAT = Profit Margin × 5/105 (simplified as Profit Margin ÷ 21)

For example, if a dealer purchases a car for AED 100,000 and sells it for AED 200,000, the profit margin is AED 100,000, and the VAT due is AED 4,761.90 (100,000 ÷ 21).

An important principle: losses cannot offset profits. If goods are sold at a loss or break-even, no VAT is due on that transaction, but losses cannot reduce VAT on profitable sales.

Compliance Requirements

Record-Keeping: Dealers must maintain a stock book detailing each good purchased and sold under the scheme, plus purchase invoices. When purchasing from non-registrants, dealers must create self-invoices containing specific information including the seller's signature, transaction details, and the dealer's TRN.

Invoice Requirements: Tax invoices for scheme sales must clearly state "Tax charged with reference to the profit margin" and include all standard tax invoice elements except the VAT amount. Critically, once a dealer issues an invoice showing the VAT amount, they cannot elect to use the scheme for that supply.

VAT Return Reporting: Dealers must indicate scheme usage via a checkbox on VAT Return Form 201. Box 1 reports the selling price less VAT on the profit margin (Amount column) and the VAT on the profit margin (VAT Amount column). Box 9 reports purchase prices in the Amount column with no VAT amount.

Notification Requirement: Article 43(1) of the VAT Law requires dealers to notify the FTA when opting to apply the scheme. Failure to notify triggers administrative penalties under Article 76 of the VAT Law.

Optional Nature and Flexibility

The scheme is entirely optional and can be applied selectively on a transaction-by-transaction basis. Dealers need no prior FTA approval but must comply with all record-keeping, invoicing, and reporting requirements. When not applying the scheme, normal VAT rules apply, with tax calculated on the full selling price.

Practical Considerations

The scheme particularly benefits businesses dealing in used vehicles, electronics, antiques, and collectibles. Used car dealers, for instance, frequently purchase from private individuals and would otherwise face significant VAT burdens without margin scheme relief.

The guide provides extensive practical examples covering various scenarios: goods never subjected to VAT, purchases with associated costs, Article 53 goods, imported goods, and loss-making sales. These illustrations clarify the scheme's application across diverse business situations.

Conclusion

The Profit Margin Scheme represents a carefully calibrated tax relief mechanism that balances revenue collection with fairness to second-hand goods dealers. By taxing only the dealer's margin, the UAE VAT system avoids cascading effects that would otherwise disadvantage the resale market. The January 2026 guide provides businesses with comprehensive, practical guidance for implementing this valuable provision, supported by clear examples and detailed compliance requirements. Dealers in eligible goods should carefully evaluate whether the scheme benefits their operations while ensuring meticulous compliance with all technical requirements.

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