When filing your VAT return, you would have noticed a question asking if VAT was charged under the profit margin scheme. Do you know what it is, or what to answer in your tax return?
If you do not charge VAT under the profit margin scheme you must make sure you correctly answer “no” to the question asked in the return. Additionally you need to know in what cases you can charge as per the profit margin scheme. If you make supplies that qualify for this scheme, VAT must be charged correctly and the proper records need to be maintained in such a case.
Under the profit margin scheme in UAE, VAT is chargeable on profit margin only. Here the profit margin is the difference between the purchase price of the Goods and the selling price of the Goods, and the profit margin shall be deemed to be inclusive of Tax.
How is the Profit Margin Scheme calculated?
If the used car was purchased for AED 80,000 and sold for AED 101,000 (inclusive of VAT), the profit margin is AED 21,000 and the VAT for this sale is AED 1,000. VAT is not chargeable on the entire supply.
What goods are eligible for the Profit Margin Scheme?
Only certain goods qualify for the profit margin scheme, listed below:
- Second-hand Goods, meaning tangible moveable property that is suitable for further use as it is or after repair.
- Antiques, meaning goods that are over 50 years old.
- Collectors’ items, meaning stamps, coins and currency and other pieces of scientific, historical or archaeological interest.
Additionally the FTA has clarified that goods that were purchased before the implementation of VAT, and that goods that have not been previously subject to VAT, do not qualify for the profit margin scheme.
What are the conditions for the Profit Margin Scheme?
Taxable persons may apply the profit margin scheme to eligible goods if:
a.The goods were purchased from either
i) A Person who is not a Registrant.
ii) A Taxable Person who calculated the Tax on the supply by reference to the profit margin.
b.The taxable person made a supply of the goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. 52 of 2017.
What records need to be maintained when charging VAT as per the Profit Margin Scheme?
a. A stock book or a similar record showing details of each Good purchased and sold under the profit margin scheme.
b. Purchase invoices showing details of the Goods purchased under the profit margin scheme. Where the Goods are purchased from Persons who are not Registrants, the Taxable Person must issue an invoice showing details of the Goods himself, including at least the following information:
- The name, address and Tax Registration Number of the Taxable Person.
- The name and address of the Person selling the goods.
- The date of the purchase.
- Details of the Goods purchased.
- The amount payable in respect of the Goods.
- Signature of the Person selling the Good or authorized signatory.
The Tax Invoice raised must also clearly mention that VAT is charged as per the profit margin scheme. The invoice needs to also include all the format requirements of a tax invoice, with the exception of the tax amount.
Do note a taxable person may not follow the profit margin scheme, if a Tax Invoice or another document is raised showing VAT charged on the entire supply.
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