Profit Margin Tax Scheme [Used Car Sales]

Profit margin tax is a value-added tax (VAT) scheme created by the FTA AE for the benefit of the used goods industry.

The scheme allows VAT to be applied only to the profit portion of the goods sold, provided full VAT has been charged on the goods previously.

Working Example

Ahmed buys a brand new car from a dealer in Dubai. He pays AED 100,000 plus 5% VAT. Regardless of how he purchases the car i.e. full cash or on finance VAT of 5% has been paid on the total value of the car. Now since he is a consumer and not a UAE business that has undergone VAT registration, he will NOT be able to claim for VAT return, according to the FTA rules.

6 months later Ahmed decides to sell the Car to Khaled (a used car dealer) based in Dubai. After agreeing on the price of AED 80,000 Khaled pays Ahmed in cash. Ahmed then sells the car through his showroom for a price of AED 85,000.

Let’s calculate his VAT liability

Purchase PriceAED 80,000
Selling PriceAED 85,000
ProfitAED 5,000
VAT Liability (5% of AED 5,000)AED 250

Common Mistakes

  1. Deducting expenses before calculating the Profit; there is no provision in any FTA portal publications that allow for the deduction of expenses on the used car before calculating the Profit element on which the VAT is applied. Therefore you cannot deduct car polishing, car repairs, and other expenses before calculating the Profit on which VAT is applicable.
  2. Charging Profit Margin Tax to used cars 2017 or earlier; Profit Margin Scheme can only be used for cars where the FULL VAThas been previously applied, therefore since cars previous to 2017 or earlier have not had the full vat applied it is not possible to apply the Profit Margin Scheme to these cars.

NOTE: Profit Margin Tax can still be applied to cars 2017 or earlier but only if the full vat was applied by a used car dealer in the chain of events.

If you are looking for an accountant in Dubai then speak to Mubashir Malik, a Managing Partner at the firm. You can reach him directly on [email protected].

Note: www.profitsplus.ae is a domain belonging to Profits Accounting and Bookkeeping, an accounting and bookkeeping firm registered with Dubai Economy, Trade License No. 796316.