Under normal UAE VAT rules, a business charges 5% VAT on the full selling price of goods and recovers the input VAT paid on purchases. The system works smoothly when VAT flows through every link in the supply chain. But for resellers of second-hand goods, antiques, and collectors’ items, the standard method creates a problem. If you purchase goods from a private individual or a non-VAT registered seller, there is no input VAT to recover. Charging 5% on the full selling price means VAT effectively cascades, and the reseller bears a disproportionate tax burden.
The Profit Margin Scheme exists to solve this problem. On 5 January 2026, the Federal Tax Authority (FTA) published VAT Guide VATGPM1, the first comprehensive official guidance on the Profit Margin Scheme under Article 29 of the UAE VAT Executive Regulation. This guide clarified the eligibility criteria, calculation methods, invoicing requirements, and reporting obligations that apply to businesses using the scheme.
This blog explains what the scheme covers, who can use it, how the VAT calculation works, and what you need to do to stay compliant. Whether you operate a used car dealership, a vintage furniture shop, or any retail and trading business dealing in pre-owned goods across Dubai, Abu Dhabi, or the wider UAE, this guide is for you.
What Is the Profit Margin Scheme?
The Profit Margin Scheme is an optional VAT mechanism that allows eligible resellers to account for VAT only on the profit margin rather than the full selling price. The profit margin is the difference between the price at which you purchased the goods and the price at which you sell them. This approach prevents VAT from cascading on goods that have already been subject to VAT at an earlier stage of the supply chain, or where input VAT recovery was restricted.
The scheme is established under Article 43 of the UAE VAT Decree-Law (Federal Decree-Law No. 8 of 2017) and Article 29 of the VAT Executive Regulation. It is optional and can be applied on a transaction-by-transaction basis. No prior approval from the FTA is required to use it. However, once you choose to apply the scheme to a particular sale, you must follow all the associated invoicing, record-keeping, and VAT return filing requirements for that transaction.
Which Goods Are Eligible for the Profit Margin Scheme?
The scheme does not apply to all used goods. It is limited to specific categories defined by the FTA in VAT Guide VATGPM1. The eligible goods are:
Second-Hand Goods
These are tangible, movable items that can be used again in their current condition or after minor repairs. Common examples include used cars, pre-owned mobile phones, laptops, furniture, and machinery. Scrap items that cannot be used in their existing form do not qualify. For businesses in the automotive and retail sectors, this is the most commonly relevant category.
Antiques
These are physical items such as art, furniture, or decorative objects that are more than 50 years old. The age of the item must be verifiable through documentation or provenance records.
Collectors’ Items
These include stamps, coins, currency, and other pieces of scientific, historical, or archaeological significance. The items must have collectible value beyond their face value or material worth.
Article 53 Goods
This category covers goods where input VAT recovery was blocked under Article 53 of the VAT Executive Regulation. The most common example is motor vehicles purchased for the private use of company employees or executives. When such goods are subsequently sold, the business can elect to apply the Profit Margin Scheme. Our Financial Consultancy and Advisory team can help you determine whether your goods fall within this category.
Eligible Transactions: When Can You Apply the Scheme?
The Profit Margin Scheme can only be applied when the goods meet the eligibility criteria and the transaction satisfies specific conditions. The scheme is available when:
- You purchase eligible goods from a non-VAT registered person (such as a private individual selling their used car or furniture)
- You purchase eligible goods from another VAT-registered reseller who also applied the Profit Margin Scheme to that supply
- You sell goods for which input VAT recovery was blocked under Article 53 of the VAT Executive Regulation
A critical requirement is that the goods must have been subject to UAE VAT at some point in their supply chain history. Goods that were purchased before the introduction of VAT in the UAE (1 January 2018) and have never entered a VAT-taxable supply chain are not eligible. Documentary evidence of prior VAT treatment is essential. Our bookkeeping team can help you establish the documentation trail needed to support scheme eligibility.
How Is VAT Calculated Under the Profit Margin Scheme?
The calculation is the most important part to get right. Under the scheme, the profit margin is treated as inclusive of VAT. This means you extract the VAT from the margin using the VAT fraction (5/105), rather than adding 5% on top.
Step-by-step calculation:
- Step 1: Determine your purchase price. This includes the price paid for the goods plus any direct costs such as transportation, repair, or preparation costs incurred to make the item ready for resale.
- Step 2: Determine your selling price. This is the total consideration received from the buyer.
- Step 3: Calculate the profit margin. Selling price minus purchase price equals your profit margin.
- Step 4: Extract VAT from the margin. Divide the profit margin by 21 (which equals 5/105) to find the VAT amount.
Practical example:
- You purchase a used car from a private seller for AED 80,000
- You sell the car to a customer for AED 95,000
- Profit margin = AED 95,000 minus AED 80,000 = AED 15,000
- VAT = AED 15,000 divided by 21 = AED 714.29
Under standard VAT rules, you would charge 5% on the full AED 95,000, resulting in AED 4,523.81 in VAT. The Profit Margin Scheme reduces your VAT liability to just AED 714.29 on this transaction. That is a significant difference for retail and trading businesses dealing in high-value used goods.
What Happens When You Sell at a Loss or Break Even?
If you sell the goods for less than or equal to your purchase price, no VAT is due on that transaction. However, a loss on one transaction cannot be offset against the profit on another. Each supply is treated independently for Profit Margin Scheme purposes. This is a critical distinction that many businesses miss.
Invoicing and Record-Keeping Requirements
The FTA places strict requirements on invoicing and documentation when the Profit Margin Scheme is applied. Failure to meet these requirements can result in the FTA denying the scheme and reassessing VAT on the full selling price, plus applicable penalties.
Invoicing Rules
- Your tax invoice must clearly state that VAT was charged with reference to the Profit Margin Scheme
- The invoice must NOT show the VAT amount separately. The total is presented as a single figure inclusive of VAT on the margin
- All other standard tax invoice requirements still apply (seller name, TRN, address, invoice date, buyer details, description of goods)
- If you issue an invoice that separately discloses the VAT amount, you lose the ability to apply the scheme for that transaction. This is irreversible. Working with experienced VAT Compliance professionals ensures your invoicing is set up correctly from the start
Record-Keeping Rules
- Maintain a dedicated stock book tracking all goods bought and sold under the scheme, including dates, prices, descriptions, and unique identifiers for each item
- When purchasing from a non-VAT registered seller, prepare a self-issued invoice documenting the seller’s name, details, purchase date, item description, and amount paid
- Retain all supporting evidence proving that the goods were previously subject to UAE VAT
- Our Bookkeeping and Outsource Accounting services include setting up scheme-specific record-keeping frameworks that meet FTA audit standards
How to Report the Profit Margin Scheme on Your VAT Return
Reporting transactions under the scheme on your VAT return requires specific entries in the EmaraTax portal. The FTA’s guidance outlines the following:
- Box 1 (Output Tax): In the Amount column, enter the selling price minus the VAT calculated on the profit margin. 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 for the period in which the goods were acquired. Enter zero in the VAT Amount column, because input VAT cannot be recovered under the scheme.
- Profit Margin Scheme Checkbox: Select ‘Yes’ in the Profit Margin Scheme section of the VAT return to confirm that transactions are being reported under the scheme.
Transactions must be reported in the correct tax period and attributed to the Emirate where the establishment most closely connected to the supply is located. Errors in reporting can trigger FTA audit queries. Our VAT Return Filing service manages these entries with precision for businesses across Dubai and Abu Dhabi.
Who Benefits Most from the Profit Margin Scheme?
While the scheme is available to any VAT-registered reseller of eligible goods, certain business types benefit significantly more than others:
- Used car dealerships and automotive traders who purchase vehicles from private individuals
- Pre-owned electronics retailers selling refurbished phones, laptops, and gaming equipment
- Antique dealers, vintage furniture shops, and art galleries selling items over 50 years old
- Coin and stamp dealers, rare book sellers, and collectibles traders
- Businesses that previously purchased company vehicles or equipment for private use (Article 53 goods) and are now reselling them
For traders who are just entering the UAE market and need to register for VAT before they can use the scheme, our vat registration services through the VAT Registration and Deregistration page handle the end-to-end process, including configuring your invoicing system for Profit Margin Scheme compliance from day one.
If your business also handles Corporate Income Tax and VAT compliance simultaneously, Asad Abbas & Co., with over 10 years of UAE experience, 1000+ audits completed, and a team of 40+ qualified professionals (CPAs, CGMAs, CMAs), provides integrated support across both tax streams. Our FTA Approved Tax Agent status ensures your compliance is handled by a recognized firm with offices in Business Bay (Dubai), Al Reem Island ADGM (Abu Dhabi), and Al Danah East (Abu Dhabi).
Conclusion
The Profit Margin Scheme is one of the most valuable VAT mechanisms available to resellers in the UAE, yet it remains underutilized by many businesses that qualify. By calculating VAT only on the profit margin rather than the full selling price, traders dealing in second-hand goods, antiques, and collectors’ items can significantly reduce their VAT liability on every qualifying transaction. The publication of FTA Guide VATGPM1 in January 2026 has brought much-needed clarity to the eligibility criteria, calculation methods, and reporting requirements. However, the scheme demands disciplined record-keeping, precise invoicing, and accurate VAT return reporting. Getting any of these wrong can result in the FTA denying the scheme and reassessing VAT on the full selling price. If your business qualifies for the Profit Margin Scheme and you want to implement it correctly, contact Asad Abbas & Co. to work with a team that understands the practical details of making this scheme work for your business.
Frequently Asked Questions (FAQs)
1. What is the Profit Margin Scheme under UAE VAT?
The Profit Margin Scheme is an optional VAT mechanism that allows eligible resellers to calculate and pay VAT only on the profit margin (the difference between the purchase price and the selling price) rather than on the full selling price. It was introduced under Article 43 of the UAE VAT Decree-Law and Article 29 of the VAT Executive Regulation. The FTA published detailed guidance in VAT Guide VATGPM1 on 5 January 2026. The scheme is designed to prevent VAT cascading on goods that were previously subject to VAT but where input VAT cannot be recovered by the reseller. It applies to second-hand goods, antiques over 50 years old, collectors’ items, and goods where input VAT was blocked under Article 53 of the Executive Regulation. No prior FTA approval is needed to use the scheme. Learn more on our VAT services page.
2. How is VAT calculated under the Profit Margin Scheme?
The profit margin is treated as inclusive of VAT. To calculate the VAT amount, you use the VAT fraction of 5/105. For example, if you purchase goods for AED 50,000 and sell them for AED 60,000, the profit margin is AED 10,000. The VAT amount is AED 10,000 divided by 21, which equals AED 476.19. Under standard VAT rules, you would charge 5% on the full AED 60,000, resulting in AED 2,857.14 in VAT. The scheme reduces your VAT liability by more than 80% on this transaction. Each transaction is assessed independently, and losses on one sale cannot be offset against profits on another. If goods are sold at a loss or break even, no VAT is due.
3. Which businesses can use the Profit Margin Scheme in the UAE?
Any VAT-registered reseller of eligible goods can use the scheme. It is most commonly used by used car dealerships, pre-owned electronics retailers, antique dealers, vintage furniture shops, coin and stamp dealers, and businesses reselling company vehicles or equipment that were originally purchased for private use. The goods must have been subject to UAE VAT at some point in their history, and the reseller must have documentary evidence of this. Businesses dealing exclusively in new goods or goods that were never part of a UAE VAT supply chain cannot use the scheme. For businesses across 14+ industries in Dubai and Abu Dhabi, our team can assess your eligibility and set up the necessary documentation.
4. What invoicing rules apply under the Profit Margin Scheme?
Tax invoices issued under the scheme must clearly state that VAT was charged with reference to the Profit Margin Scheme. Critically, the invoice must not separately disclose the VAT amount. The total is shown as a single figure inclusive of VAT on the margin. All other standard tax invoice requirements apply, including the seller’s name, TRN, address, invoice date, buyer details, and a clear description of the goods. If you issue an invoice that separately shows the VAT amount, you permanently forfeit the right to apply the scheme for that specific transaction. This makes invoice setup one of the highest-risk areas for compliance. Our Bookkeeping and Outsource Accounting services configure your invoicing system for scheme-compliant output from the start.
5. What records must I keep to use the Profit Margin Scheme?
The FTA requires resellers applying the scheme to maintain a dedicated stock book that tracks all goods purchased and sold under the scheme. Each entry should include the date of purchase and sale, a description of the item, the purchase price, the selling price, and a unique identifier for the goods. When purchasing from a non-VAT registered seller, you must prepare a self-issued invoice documenting the seller’s details, the purchase date, item description, and amount paid. You must also retain evidence that the goods were previously subject to UAE VAT. Without this documentary proof, the FTA can deny the use of the scheme during an audit and reassess VAT on the full selling price, plus applicable penalties.
6. Can the FTA deny the use of the Profit Margin Scheme?
Yes. The FTA can deny the scheme if the eligibility conditions are not met, if the required documentation is missing or insufficient, or if the invoicing requirements are not followed. The most common reasons for denial include issuing a tax invoice that separately discloses the VAT amount, failing to maintain a stock book, lacking evidence that the goods were previously subject to VAT, and applying the scheme to goods that do not fall within the eligible categories. If the scheme is denied, VAT is reassessed on the full selling price, and standard penalties under the Tax Procedures Law apply. If you face an incorrect assessment, our VAT Reconsideration service can help you file a formal dispute with the FTA.
