UAE VAT Profit Margin Scheme

The Federal Tax Authority has issued VAT Guide VATGPM1 – Profit Margin Scheme, marking the first comprehensive official guidance on the application of Article 29 of the UAE VAT Executive Regulation. The Guide provides clarity on eligibility, calculation mechanics, invoicing obligations, record-keeping, and VAT return reporting.

The Scheme is designed to prevent VAT cascading where goods have already borne VAT earlier in the supply chain or where input tax recovery is restricted. While optional, it introduces technical compliance requirements that demand careful implementation.

1. Overview of the Profit Margin Scheme

Under normal VAT rules, VAT is charged on the full value of a taxable supply. The Profit Margin Scheme allows eligible resellers to account for VAT only on the profit margin, defined as the difference between the selling price and purchase price.

The profit margin is deemed inclusive of VAT, and VAT is calculated using the VAT fraction (5/105).

2. Goods and Transactions Eligible for the Scheme

The Scheme applies only where goods were previously subject to VAT and fall within one of the following categories:

• Second-hand goods suitable for reuse as-is or after repair
• Antiques that are more than 50 years old
• Collectors’ items such as stamps, coins, and items of historical or scientific interest
• Goods where input tax recovery was blocked under Article 53 of the VAT Executive Regulation

Goods imported by the reseller are generally excluded unless the import VAT was non-recoverable under Article 53.

The burden of proof rests with the reseller, who must retain sufficient documentary evidence that VAT was previously imposed.

3. Optional Nature and Conditions of Use

The Profit Margin Scheme is optional and may be applied on a supply-by-supply basis. Prior approval from the FTA is not required. However, once VAT is disclosed on an invoice, the Scheme cannot be applied to that transaction.

When applying the Scheme, the reseller must:

• Issue a tax invoice stating that VAT is charged with reference to the Profit Margin Scheme
• Exclude the VAT amount from the invoice
• Maintain prescribed records
• Disclose the election in the VAT return

Failure to meet any of these conditions may invalidate the use of the Scheme.

4. VAT Calculation Under the Scheme

The Profit Margin is calculated as:

• Selling Price − Purchase Price
• VAT due is calculated as:
• Profit Margin × (5 / 105)
  (or Profit Margin ÷ 21)

If goods are sold at a loss or break-even, no VAT is due, and losses cannot be offset against profits on other transactions.

5. Record-Keeping and Invoicing Requirements

Resellers applying the Scheme must maintain:

• A stock register for goods purchased and sold under the Scheme
• Purchase documentation, including self-issued invoices for non-registrant sellers
• Evidence demonstrating prior VAT exposure
• Tax invoices issued under the Scheme

Invoicing errors, particularly disclosure of VAT amounts, remain a high-risk audit area.

6. VAT Return Reporting Obligations

Key reporting requirements include:

• Declaration of Scheme usage via the VAT return checkbox
• Reporting purchase prices in Box 9 (Amount column only)
• Reporting selling prices net of VAT on the margin in Box 1, with VAT shown separately

Transactions must be reported in the correct Tax Period and Emirate in line with establishment rules.

What Businesses Should Do Now.

Given the technical nature of the Scheme and its audit sensitivity, businesses should:

1. Review eligibility of goods and historic VAT exposure
2. Strengthen documentation collection at point of purchase
3. Update invoicing templates and ERP configurations
4. Implement transaction-level margin calculations
5. Train finance and sales teams on Scheme conditions
6. Conduct internal reviews of past resale transactions

The Profit Margin Scheme offers meaningful VAT relief for qualifying resellers but demands disciplined compliance. With the issuance of VATGPM1, the FTA has clarified expectations and raised the standard for documentation, invoicing, and reporting.

Businesses that proactively align their systems and controls will be best positioned to benefit from the Scheme while mitigating regulatory and audit risk.