Mastering the UAE VAT Profit Margin Scheme: A 2026 Comprehensive Guide

Mastering the UAE VAT Profit Margin Scheme

The UAE Value Added tax (VAT) system normally charges 5% VAT on the full selling price of goods at every stage of supplies. However, this was very unfair and not possible for businesses that sell used or unique items like second-hand goods, antiques and collectors’ items, because the reseller cannot recover the input tax on the VAT paid when they first bought the item, which results in the same value being taxed multiple times.

To solve this issue, the Federal Tax Authority (FTA) introduced the Profit Margin Scheme. Under this scheme, eligible businesses need to pay VAT only on the profit they earn from the sale of goods, not on the full selling price. This will help to avoid double taxation for resellers of used or unique items.

Updated for 2026, this guide- Value Added Tax Guide | VATGPM1- provides a deep dive into the legislative framework, eligibility criteria, and the precise calculations required to remain compliant while optimising your tax position.

1. Understanding the Rationale: Why Use the Scheme?

Normally, business pays 5% VAT when it buys a product (Input VAT) and charges 5% VAT when they sell it (Output VAT). The business then pays the difference to FTA. However, if a car dealer buys a vehicle from a private individual who is not VAT registered, no VAT is charged on that purchase. Due to this, the dealer cannot recover any input VAT.

If the dealer then sells the car for AED 100,000 under the normal VAT rules, they would have to pay as 4,761.90 as VAT. Since the car already included tax when it was first bought new by the individual, charging VAT on the full AED 100,000 ends up in double taxation. The Profit Margin Scheme fixes this by letting the dealer pay VAT only on the profit they make.

2. Eligibility: Goods and Transactions

The scheme does not apply to all used goods. It can only be used for specific types of Eligible goods and Eligible transactions that meet the conditions set by the FTA.

A. Eligible Goods

• Second-Hand Goods: These are tangible movable items that can be used again in their current condition or after minor repairs. This commonly includes used cars, mobile phones, laptops and furniture. Scrap items that cannot be used are not included.

• Antiques: These are physical items such as art, furniture etc. that are more than 50 years old.

• Collectors' Items: Rare items of scientific, historical, or archaeological value, such as stamps and coins.

• Article 53 Goods: This also includes goods where the law does not allow input VAT to be recovered, such as motor vehicles purchased for the private use of company executives.

B. The "Previously Subject to VAT" Rule

A reseller can use the scheme only if the item was subject to UAE VAT at some point before. Goods purchased before introduction of VAT (before January 1, 2018) do not qualify under this scheme. The reseller must keep the proof, like the original tax invoice received when the item was first sold as new to show it was part of the UAE VAT system.

C. Eligible Source of Purchase

You can only use the Profit Margin Scheme if you bought the goods from: 

• A Non-Registrant: An individual or a business that is not registered for VAT.

• Another VAT-registered business that applied the Profit Margin Scheme while selling item to you.

3. Calculating the Profit Margin and VAT

The Profit Margin Scheme is calculated in two steps: first, find the margin, then apply VAT 5% to it on inclusive basis.

Step 1: Calculate the Margin

The Profit Margin is the difference between the Purchase Price and the Selling Price.

• The Purchase Price includes the price paid for the goods, plus any direct costs and fees incurred to get it ready for sale, like transportation and installation.

• Selling price is the total consideration received from the buyer, including any mandatory extra charges or services directly linked to the sale.

  Formula: Profit Margin = Selling Price - Purchase Price

Step 2: Extract the VAT

Since the Profit Margin is already considered inclusive of VAT, you must extract the VAT amount using the fraction of 5/105 (which is the same as dividing the margin by 21).

Calculation Example:

A dealer buys a used watch for AED 10,000 and sells it for AED 12,100.

1. Margin: 12,100 - 10,000 = AED 2,100.

2. VAT Due: 2,100/21 = AED 100.

What if the item is sold at a loss?

If the Selling Price is lower than the Purchase Price, the Profit Margin is zero. No VAT is due, but the loss cannot be used to offset profits from other sales under the scheme.

4. Record-Keeping and Invoicing Requirements

The FTA requires strict record – keeping while applying the profit margin scheme. If these records are not properly maintained, the FTA may cancel the use of the scheme and charge VAT on the full selling price, which can significantly increase the tax payable.

• Stock Book: A dedicated and detailed record for all goods bought and sold under the scheme. It should clearly track each item from purchase to resale, including dates, prices and description.

• Self-Issued Invoices: When purchasing goods from a non-VAT-registered seller, the reseller must prepare their own invoice. This invoice must include the seller’s name and details, the purchase date, a clear description of the item and the amount paid.

• Sales Invoices: The Tax Invoice issued to customers must clearly state the wording: “VAT was charged with reference to the Profit Margin Scheme”. This confirms that VAT has been accounted by using sa pecial scheme rather than the standard method.

• No VAT Disclosure: The VAT amount must not be shown separately on the sales invoice. The selling price should be presented as a single, VAT-inclusive figure, in line with the profit margin scheme.

5. Reporting on the VAT Return (Form 201)

Reporting under the Profit Margin Scheme requires careful and accurate reporting in the Emara Tax Portal to ensure VAT is calculated correctly and remains compliant with FTA rules.

• Box 1 (Output Tax): In the “Amount” column, enter the selling price minus the VAT calculated on the profit margin and in the “VAT Amount” column, enter the actual VAT calculated on the profit margin.

• Box 9 (Purchases): Report the full Purchase Price in the “Amount” column in the period the good was acquired and in the “VAT Amount” column, enter zero, because input VAT cannot be recovered on these purchases under this scheme.

• The Checkbox:  In VAT return you must click "Yes" in the "Profit Margin Scheme" section to indicate that the transactions are being reported under the scheme.

Example

The Scenario: Selling a Pre-owned Luxury Watch

Imagine you own a high-end vintage watch boutique. You purchase a rare timepiece from a private collector and later sell it to a customer.

• Purchase Price: AED 20,000 (Acquired from a non-registered individual)

• Selling Price: AED 25,000

• Total Profit Margin: AED 5,000

Under the Profit Margin Scheme, you only owe VAT on the AED 5,000 profit, not the full AED 25,000 sales price.

Step 1: Calculate the VAT on the Margin

Since the selling price is inclusive of VAT, the tax is back-calculated from the profit margin using the standard 5% VAT rate:

VAT Amount = Profit Margin x 5/105

VAT Amount = 5,000 x 5/105 = AED 238.10

Step 2: Completing Your VAT Return

When filling out your return, you will distribute these figures across Box 1 and Box 9 as follows:

How Flyingcolour Tax Consultant Can Help

The profit margin scheme can improve cash flow, but it is complicated to manage. Flyingcolour Tax Consultant can guide you the process and help to maintain accurate stock records, ensure you have all the necessary pre-VAT purchase proofs, and reduce the risk of penalties during an FTA audit. With our support, you can benefit from the scheme without any errors. 

Frequently Asked Questions (FAQs)

Q1: Can I use the Scheme for imported second-hand goods?

No. The scheme usually does not apply if you import goods yourself. You pay VAT at the border and can claim it as input tax like normal rules. The only exception is if your VAT claim was blocked under Article 53.

Q2: Can I use the Scheme for real estate?

Technically, yes, because the definition of “goods” includes real estate. But it’s mainly meant for movable items. For real estate, you need to check and verify the property’s “previous VAT status”.

Q3: Do I need prior approval from the FTA?

No, you don’t need prior approval. You just follow the invoicing and reporting rules to use the scheme.

Q4: Can I switch back to standard VAT for some items?

Yes. You can choose which sales need use this scheme. But if you already issued a standard tax invoice, which shows VAT amount then you are not able to apply this scheme for that sale. 

Q5: What if I repair an item before selling it?

You can still use the Scheme as long as the repairs don’t change the item’s main purpose. For example, fixing a car engine is fine, but converting an aircraft engine into a coffee table changes its nature. So, this scheme cannot be applied.

To learn more about Mastering the UAE VAT Profit Margin Scheme: A 2026 Comprehensive Guide, book a free consultation with one of the Flyingcolour team advisors.

Disclaimer: The information provided in this blog is based on our understanding of current tax laws and regulations. It is intended for general informational purposes only and does not constitute professional tax advice, consultation, or representation. The author and publisher are not responsible for any errors or omissions, or for any actions taken based on the information contained in this blog.