If your business buys and resells used goods, antiques, or collector's items, there is a special VAT option that can save you money and avoid double taxation. It's called the Profit Margin Scheme. Here's a simple explanation of how it works and how it can help your business.

What is the Profit Margin Scheme?

Normally, when you sell goods, VAT is charged on the full selling price. But under the Profit Margin Scheme, VAT is only charged on your profit margin, not the full price. The profit margin is simply the difference between what you paid for the item and what you sold it for.

This is especially useful when you buy goods from people or businesses who are not VAT-registered, because in that case you cannot normally recover any VAT on your purchase. Charging VAT again on the full selling price would mean the same value gets taxed twice. The Profit Margin Scheme fixes this problem.

Which goods qualify?

The scheme can only be used for certain types of goods, and only if those goods were already subject to VAT at some earlier point in their history. The eligible categories are:

● Second-hand goods - items that can still be used as they are, or after minor repair, such as used cars, phones, electronics, or furniture.
● Antiques - goods that are more than 50 years old.
● Collector's items - such as stamps, coins, currency, or other rare items of historical or scientific value.

One important condition: the item must have been taxed with VAT before, at some point in the supply chain. Goods that were never subject to VAT (for example, because they were bought before VAT was introduced) cannot use this scheme.

When can a business use the scheme?

There are two common situations where the scheme applies:

● You buy eligible goods from someone who is not VAT-registered, or from a VAT-registered seller who also used the Profit Margin Scheme when selling to you.
● You sell goods where you were not able to reclaim the VAT on your original purchase, for example, a car that was partly used for personal reasons.

The scheme is optional. A business can choose to apply it on a sale-by-sale basis, and no prior approval is needed. However, once you issue a tax invoice showing the full VAT amount for a sale, you can no longer apply the scheme to that particular sale.

How is the VAT calculated?

The calculation is done in two simple steps:

Step 1: Work out the profit margin

Profit Margin = Selling Price - Purchase Price

The purchase price includes the price you paid plus any extra costs needed to get the item ready for resale, such as transport or repair costs. This profit margin already includes VAT.

Step 2: Calculate the VAT on the profit

VAT = Profit Margin ÷ 21

This shortcut works because VAT is charged at 5%, so dividing the margin by 21 gives you the exact VAT amount included in that margin.

A quick example

Suppose a used car dealer buys a car for AED 100,000 from a private individual, and later sells it for AED 200,000.

So instead of paying VAT on the full AED 200,000, the dealer only pays VAT on the AED 100,000 profit.

What if the item is sold at a loss?

If a good is sold at a loss or with no profit at all, no VAT is due on that particular sale. However, losses on one item cannot be used to offset profits made on another item. Each sale is treated on its own.

What records need to be kept?

Businesses using the scheme need to be organised, since good documentation is key. This includes:

● A stock record showing details of every item bought and sold under the scheme.

● Purchase invoices for the goods bought.

● Proof that VAT was charged on the item at some earlier stage, such as a copy of the original tax invoice.

When buying from someone who is not VAT-registered, the buyer should also create their own purchase record, noting details like the seller's name and address, the date, a description of the goods, the amount paid, and the seller's signature.

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