You sell a used car for AED 200,000 that you bought for AED 100,000. Under normal VAT rules, you’d owe AED 9,524 in VAT – calculated on the full selling price. Under the Profit Margin Scheme, you owe AED 4,762 – calculated only on your profit. That’s a difference of nearly AED 5,000 on a single transaction.

The Federal Tax Authority published its first ever dedicated guide on the Profit Margin Scheme in January 2026 (VATGPM1). If you’re a used goods dealer, an antique trader, or a business that has ever sold a company car – you need to read this.

The Scheme is an optional arrangement. It allows a VAT-registered reseller to calculate VAT on the profit margin – the difference between what they paid and what they sold for – rather than on the full value of the supply. The purpose is to prevent VAT cascading: where VAT effectively gets charged twice on the same goods because the reseller couldn’t recover the input tax they paid.

This matters because when you buy goods from a private individual who isn’t VAT-registered, there’s no input tax to recover. Without the Scheme, you’d still charge output VAT on the full selling price – taxing value that was already taxed somewhere in the chain. The Scheme fixes that.

Three categories of goods are eligible, but only if they were previously subject to VAT at some point in the supply chain.

One critical point that catches businesses out: goods purchased before 1 January 2018 – before UAE VAT was introduced – cannot use the Scheme, even if bought today from a non-registrant. The goods must have been subject to VAT at some point in the preceding supply chain. The burden of proof is on you, the reseller. If you can’t produce evidence – such as the original tax invoice issued when the non-registrant acquired the goods – the Scheme doesn’t apply and you must charge VAT on the full selling price.

Repair is permitted. Refurbishing a second-hand car before resale doesn’t disqualify it. But if the goods are fundamentally transformed – aircraft equipment bought and sold as furniture, for example – they no longer qualify as Second-Hand Goods.

The January 2026 guide sets out three distinct situations where the Scheme can be used.

Purchases from non-registrants or from a seller who applied the Scheme. This is the most common scenario. You buy a used item from a private individual, or from another business that already applied the Scheme when selling to you. In both cases, you can apply the Scheme on resale.

Article 53 Goods – the category most businesses overlook. Article 53 of the VAT Executive Regulation blocks input tax recovery on certain goods – most notably, motor vehicles available for private use. When a company buys a car for business and personal use, it cannot recover the VAT it paid. When that car is later sold, the Scheme can apply. This is not limited to Eligible Goods – it covers any goods where input tax was blocked under Article 53.

This matters more than most businesses realise. Every company that has ever sold a company car, a pool vehicle, or any mixed-use asset where input tax was blocked can potentially apply the Scheme on disposal. The new guide makes this explicit for the first time.

Imported goods – an important exception. The Scheme generally does not apply to imported goods. If you import an antique or a second-hand item and pay Import VAT, you can typically recover that VAT through the normal rules – so there’s no cascading problem to solve, and the Scheme doesn’t apply. However, if the Import VAT was blocked under Article 53 (for example, a non-registrant imports a personal computer and then sells it to you), the Scheme can apply on your resale.

Two steps. First, calculate the Profit Margin. Then calculate the VAT on that margin.

Profit Margin = Selling Price – Purchase Price

The Profit Margin is VAT-inclusive. The Purchase Price includes the price paid plus any costs incurred to get the good ready for resale – transport and installation costs count. The Selling Price includes any ancillary supplies directly linked to the sale (such as non-optional accessories fitted during repair). Separate services like extended warranties are not included and are subject to normal VAT rules.

VAT = Profit Margin × 5/105 (or simply: Profit Margin ÷ 21)

Three worked examples from the FTA Guide VATGPM1 illustrate how this plays out in practice:

Goods sold at a loss or at break-even: no VAT is due. If the Profit Margin is zero or negative, there is no Output Tax. There is also no offsetting – if you sell four cars and two at a loss, the losses on those two cannot be set against the profits on the other two. Each supply stands alone.

Here is where many businesses make an error that disqualifies them from the Scheme entirely.

When you apply the Profit Margin Scheme, the Tax Invoice must clearly state that VAT was charged with reference to the Profit Margin. Critically, the VAT amount must not appear on the invoice. If you issue a standard Tax Invoice that shows the VAT amount, you have forfeited the right to apply the Scheme for that transaction – and must instead account for VAT on the full selling price.

The Scheme is applied per transaction. You can choose on each supply whether to apply it or not.

Two core records are required under Article 29(6) of the VAT Executive Regulation: a stock book showing details of every good purchased and sold under the Scheme, and purchase invoices for all goods purchased under it.

When buying from non-registrants, you must issue your own purchase invoice. It needs to include: your name, address, and TRN; the seller’s name and address; the date; a description of the goods; the consideration payable; and the seller’s signature or that of an authorised signatory. You must also retain evidence – such as the original tax invoice issued to the non-registrant – proving the goods were previously subject to VAT.

The Scheme has specific reporting requirements in VAT Return 201 on EmaraTax.

First, there is a checkbox asking whether you applied the Profit Margin Scheme during the Tax Period. Answer “Yes” if you did; “No” if you didn’t. This must be completed accurately every return.

For the selling side: report in Box 1 of the VAT Return for the Tax Period in which the supply was made. Enter the Selling Price less the VAT on the Profit Margin in the Amount column, and the VAT on the Profit Margin in the VAT Amount column.

For the purchase side: report the Purchase Price of goods intended to be sold under the Scheme in the Amount column of Box 9 in the Tax Period those goods were acquired. No VAT amount is entered in Box 9 for these purchases.

Supply should be attributed to the Emirate where the establishment most closely connected to the supply is located.

The Profit Margin Scheme is governed by Article 29 of Cabinet Decision No. 52 of 2017 on the Executive Regulation of Federal Decree-Law No. 8 of 2017 on Value Added Tax. The FTA Guide VATGPM1 (January 2026) is the first dedicated official guide on the Scheme. It also references VAT Public Clarification VATP002 on eligible goods, which remains active alongside the new guide.