The UAE Federal Tax Authority (FTA) has released a comprehensive Profit Margin Scheme Guide (VATGPM1), effective January 2026. The Guide offers clarity on how certain resellers can account for VAT in the UAE.
Let’s go through the key highlights of the guide:
What Is the Profit Margin Scheme?
As per standard UAE VAT rules, businesses charge 5% VAT on the full selling price of goods. However, for eligible resellers, the Profit Margin Scheme allows VAT to be applied only on the profit margin, the difference between what the reseller paid for the item and what it is sold for.
This approach is particularly useful when input tax cannot be claimed, for example, when purchasing from non-VAT registered individuals, because the reseller has no VAT credit to recover. The benefit of the profit margin scheme is that it prevents the VAT cascading effect, where tax is unnecessarily charged multiple times along the supply chain.
Who Can Use the Scheme?
The Profit Margin Scheme is optional and may be elected on a transaction-by-transaction basis. It applies only to specific categories of goods that have previously been subject to VAT, such as:
- Second-hand goods that can be reused as-is or after repair
- Antiques (goods over 50 years old)
- Collectors’ items (e.g., coins, stamps, other items of historical or scientific interest)
- Goods where input VAT recovery was blocked under Article 53 of the VAT Executive Regulations
Imported goods are usually not eligible for the profit margin scheme unless the reseller couldn’t reclaim import VAT under Article 53 of the law. Resellers must retain evidence that VAT was indeed paid earlier in the supply chain, making documentation a key compliance requirement.
How VAT Is Calculated Under the Profit Margin Scheme?
Instead of calculating VAT on total sales, the Profit Margin Scheme uses this formula:
Profit Margin = Selling Price − Purchase Price
VAT due is then: Profit Margin × (5 / 105)
This method treats the profit margin as VAT-inclusive. If an item is sold at break-even or at a loss, then no VAT is due but losses cannot be carried forward or offset against profits in other transactions.
Important Invoicing and Record-Keeping Rules
To correctly apply the Profit Margin Scheme, resellers must:
- Issue a tax invoice clearly stating that VAT is charged under the Profit Margin Scheme
- Exclude the VAT amount from the invoice total
- Maintain a detailed stock register for all goods eligible under the scheme
- Retain purchase documents, including self-issued invoices for goods purchased from from non-VAT-registered persons
- Demonstrate that the goods were previously subject to VAT
Even small invoicing errors, such as showing VAT on the invoice incorrectly, can trigger audit issues, so businesses are advised to be meticulous with documentation.
VAT Return Reporting Requirements
- Declare the use of the Profit Margin Scheme by selecting the relevant checkbox in the VAT return
- Report purchase prices in Box 9 (amount only)
- Report selling price under the Profit Margin Scheme as VAT inclusive in Box 1
- Ensure each transaction is recorded in the correct tax period and Emirate according to establishment rules
Practical Steps for Businesses
Given the technical and compliance requirements, companies should take proactive steps now:
- Assess eligibility of goods and confirm prior VAT exposure
- Strengthen documentation practices at the point of purchase
- Update invoicing and accounting systems to reflect the scheme
- Implement processes for calculating margins at the transaction level
- Train relevant teams on how and when to apply the scheme
- Review past resale transactions to identify where the scheme could have applied or may apply in future periods
Tax Gian Help you with Profit Margin Scheme
The UAE’s Profit Margin Scheme offers an opportunity for resellers such as those dealing in second-hand goods, antiques, or collectibles to reduce VAT burdens and improve cash flow. However, taking full advantage of this option requires disciplined compliance and careful documentation. At this point, it is advisable to hire tax consultants such as Tax Gian. Our VAT experts can help you comply with the UAE VAT law and other related requirements.
