Profit Margin Scheme
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Profit Margin Scheme

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The profit margin scheme is a policy conducted by the Federal Tax Authority that made VAT payments easier to the end consumer when the good is a “second-hand used good”, without decreasing the VAT amount that is to be received by the FTA from this particular good.

It is important for companies to know where and when to apply the profit margin scheme. The profit margin scheme is applied on the following goods:

  1. Second hand goods, in which they were initially purchased after the implementation of the VAT on January 1st, 2018, knowing that VAT has been paid on this particular good in its initial purchase.
  2. Antiques that are over 50 years old.
  3. Collectors’ items

How does it apply?

For example, a car dealer has purchased a car for the first time for AED 100,000 plus VAT, which is a total of AED 105,000. The Dealer then has sold the same car to a consumer for AED 120,000. Here, the profit margin scheme should be applied, in which the car dealer will charge VAT only on the profit earned from the car sale, in which the profit in this case is AED 20,000, so the VAT to be charged is 5% of 20,000 which is AED 1,000. It is important for companies applying the profit margin scheme to understand that they will not be allowed to apply the scheme if they issue an invoice or any other document mentioning the VAT amount charged on the particular sale, only amounts inclusive of VAT must be shown on the tax invoice, and it should clearly clarify that the amount mentioned is inclusive of VAT based on the profit margin scheme.

Exceptions for the Profit Margin Scheme

As mentioned earlier, the profit margin scheme is to be applied on second-hand goods that were initially purchased and paid inclusive of VAT by a certain approved dealer after the implementation of VAT and are to be sold again to an end consumer. If this particular condition is satisfied, then the only case where profit margin scheme will not apply is when the dealer issues an invoice showing VAT on the whole selling price. In that case, the dealer is obliged to pay the whole VAT charged to the consumer, to the FTA and not only the VAT on the profit.

The other case where an approved dealer is not permitted to apply the profit margin scheme is if the dealer has purchased the particular product before the implementation of VAT on January 1st, 2018, in which if so, the dealer has not paid VAT on the certain product. In that case. The dealer is obliged to charge 5% VAT on the whole selling price of the certain product.

Ziad Khawaja
Fame Legacy DMCC
Tax Assistant Manager – Tax Agent, TAAN: 20040382
Ziad@vatmiddleeast.com

Author: admin

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