VAT

The Profit Margin Scheme in UAE VAT

2026-02-16 · 5 min read · By Aureus Worldwide

For dealers in used cars, antiques, collectors' items and other second-hand goods, charging 5% VAT on the full selling price can be punishing, especially when no VAT was recovered on buying the stock. The profit margin scheme addresses this, letting eligible businesses account for VAT only on their margin, not the whole sale price. This guide explains how the scheme works, which goods qualify, how to calculate the VAT, and the records you must keep.

What the profit margin scheme does

Normally, a VAT-registered seller charges 5% on the full selling price of taxable goods. Under the profit margin scheme, eligible businesses instead account for VAT only on the profit margin, the difference between the price they paid for the goods and the price they sell them for. This avoids charging VAT on the full value of second-hand goods that have already moved through the economy and on which VAT was not recovered when purchased. It fits within the normal return process covered in our VAT return filing guide.

Why the scheme exists

The scheme prevents double taxation of second-hand goods. Consider a used car bought from a private individual who could not charge recoverable VAT. If the dealer then had to charge 5% on the full resale price, VAT would effectively be levied again on value that already bore VAT when the car was first sold new. By taxing only the dealer's margin, the scheme charges VAT on the value the dealer adds, not the whole price.

Which goods qualify

The scheme applies to eligible second-hand goods, broadly including categories such as:

Crucially, the goods must generally have been purchased from a person who did not charge VAT that the dealer could recover, for example, a private individual or a business selling under the same scheme. If you recovered input VAT when buying the goods, they generally do not qualify for the margin scheme on resale. Confirm the eligible categories and conditions with the FTA.

The key condition: no input VAT recovered

The defining condition is that no recoverable input VAT was incurred on the purchase of the goods. This is the trade-off at the heart of the scheme:

• You account for VAT only on the margin (a lower VAT bill), but
• You generally cannot recover input VAT on the purchase (because there was none to recover, or you give up the right)

You cannot have it both ways, taxing only the margin and recovering input VAT on the same goods. The scheme is designed for goods bought without recoverable VAT in the first place.

How to calculate the VAT

Under the scheme, VAT is calculated on the margin, treated as VAT-inclusive:

1. Take the selling price of the item
2. Subtract the purchase price you paid for it
3. The result is the margin (if positive)
4. The margin is treated as VAT-inclusive, so extract the VAT fraction from it
5. If the margin is nil or negative, there is generally no VAT on that sale

The margin is VAT-inclusive. You do not add 5% on top of the margin, you treat the margin as already containing the VAT and extract the tax fraction from it.

Because the precise calculation method and the VAT fraction depend on the rules, confirm the method with the FTA.

Invoicing under the scheme

Invoicing differs from a normal tax invoice. Under the profit margin scheme, you generally do not show the VAT amount separately on the invoice, because doing so could let the buyer recover VAT that was only charged on the margin. The invoice should make clear that the margin scheme applied. This is an important compliance point, issuing a standard tax invoice showing full VAT defeats the purpose and creates errors. Our tax invoice requirements guide covers normal invoices for comparison.

When the scheme is and is not worth using

The scheme is generally beneficial where you buy stock without recoverable VAT and resell at a margin, it reduces the VAT due compared with charging 5% on the full price. It is not appropriate where:

• You recovered input VAT on buying the goods (then normal rules apply)
• The goods are not in an eligible category
• The conditions for the scheme are not met

Applying the scheme to ineligible goods, or mixing it up with normal recovery, is a common error, so check eligibility item by item.

Record-keeping for the margin scheme

Strong records are essential, because the FTA can check both eligibility and the margin calculation. For each item, keep:

• Evidence of the purchase price and that no recoverable VAT was incurred
• Evidence of the selling price
• The margin calculation and VAT extracted
• The invoice issued under the scheme
• Records linking each sale to the specific item of stock

Item-level records matter because the margin is calculated per item. Integrating this with ongoing accounting keeps the evidence ready.

A note on changeable detail

The eligible categories, the conditions and the calculation method for the profit margin scheme are set by the rules and FTA guidance and can be refined. Treat this guide as the framework and confirm eligibility and the method with the FTA or a qualified adviser before applying the scheme.

How Aureus Worldwide helps

Aureus Worldwide helps dealers in second-hand goods determine whether the profit margin scheme applies, calculate VAT on the margin correctly, and invoice and record sales in a compliant way. Our VAT and accounting teams set up item-level records and returns, and we direct you to confirm eligibility and method with the FTA. To use the profit margin scheme correctly, contact us.

Talk to our chartered accountants →