UAE VAT Update: Profit Margin Scheme (VATGPM1)
The Federal Tax Authority (FTA) has released VAT Guide VATGPM1 – Profit Margin Scheme, providing the first comprehensive official guidance on the application of Article 29 of the UAE VAT Executive Regulation. This long-awaited guide clarifies eligibility, calculation methodology, invoicing requirements, record-keeping obligations, and VAT return reporting for businesses applying the scheme.
What is the Profit Margin Scheme?
Under UAE VAT legislation, the Profit Margin Scheme is an optional special arrangement that allows qualifying resellers to calculate VAT based on the profit margin rather than the total selling price. The key objective of the scheme is to prevent VAT cascading on goods where input tax was not recoverable.
Eligible Goods
The scheme applies to specific categories of goods, including:
• Second-hand goods – tangible movable property suitable for reuse, whether repaired or not
• Antiques – items more than 50 years old
• Collectors’ items – such as coins, stamps, and items of historical, archaeological, or scientific interest
• Goods for which input tax recovery was restricted under Article 53 of the VAT Executive Regulation
Imported goods are generally excluded unless the import VAT was not recoverable under Article 53.
When Can the Scheme Be Applied?
The Profit Margin Scheme is typically available where:
• Eligible goods are purchased from a non-registrant, or from another taxable person who applied the Profit Margin Scheme on the sale; or
• Goods are acquired on which input tax recovery was restricted under Article 53.
The reseller bears the burden of proof and must retain sufficient documentation to demonstrate eligibility.
Key Restrictions and Conditions
• The scheme is optional and may be applied on a supply-by-supply basis.
• FTA pre-approval is not required.
• The scheme cannot be applied if VAT is shown separately on a tax invoice or other document issued for the supply.
• Once VAT is disclosed on an invoice, the scheme becomes unavailable for that transaction.
Invoicing, Reporting, and Record-Keeping
When applying the Profit Margin Scheme, resellers must:
• Issue a tax invoice clearly stating that the Profit Margin Scheme has been applied
• Not show VAT separately on the invoice
• Maintain all required supporting documentation
• Correctly disclose the transaction in the VAT return
Failure to meet these requirements may result in the scheme being disallowed.
Profit and Loss Treatment
Where eligible goods are sold at a profit, VAT is calculated on the margin. Where goods are sold at a loss, no VAT is due, although losses cannot be offset against profits from other supplies.
What This Means for Businesses
The Profit Margin Scheme can deliver significant VAT efficiencies for qualifying resellers, including businesses dealing in second-hand goods, vehicles, art, collectibles, and other eligible items. However, the release of VATGPM1 raises the bar for documentation, invoicing accuracy, and internal controls.
Businesses should review their current practices to ensure alignment with the Guide and assess whether opportunities exist to apply the scheme while managing compliance and audit risks.
Disclaimer
This update is provided for information purposes only and does not constitute legal or tax advice. Businesses potentially affected by these changes should seek advice from qualified professionals or consult the Federal Tax Authority (FTA) for official guidance.
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