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UAE VAT Profit Margin Scheme Guide (Effective 2026)

FTA VAT guide profit margin scheme 2026 UAE

The Federal Tax Authority (FTA) has released a new VAT Guide on the Profit Margin Scheme (VATGPM1), effective January 2026. This guide provides detailed clarification on the application of the Profit Margin Scheme (PMS), an optional VAT mechanism designed to prevent VAT cascading on certain second-hand and special-category goods.

The guide consolidates legislative requirements, practical examples, and compliance obligations, and is particularly relevant for resellers of second-hand goods, antiques, collectors’ items, and businesses selling assets with blocked input tax.

1. Overview and Purpose of the Profit Margin Scheme

Under normal VAT rules, VAT is charged on the full value of a supply. However, the Profit Margin Scheme allows VAT to be calculated only on the profit margin, rather than on the total selling price.

The profit margin is defined as:

Selling Price – Purchase Price (inclusive of VAT)

VAT is treated as included within the margin, rather than added on top.

Objective of the Scheme

The Scheme aims to avoid VAT cascading, which can arise where:

Goods are purchased from non-registered persons, or
Goods are acquired from suppliers who already applied the Scheme, or
Input tax recovery was blocked under Article 53 of the VAT Executive Regulation.

2. Who Should Apply This Guide?

The guide is intended for VAT-registered persons who:

Resell eligible second-hand goods, or
Sell goods on which input VAT was not recoverable, and
Wish to account for VAT based on profit margin rather than full value.

Importantly, the Scheme is optional and transaction-specific, not mandatory.

3. Eligible Goods Under the Scheme

The Scheme can only be applied to goods that were previously subject to VAT and fall into one of the following categories:

3.1 Second-Hand Goods

Tangible movable goods suitable for reuse as-is or after repair, such as:

Used vehicles
Mobile phones
Electronic equipment
Furniture

Key condition: Repairs must not alter the basic nature or function of the goods. If the repair fundamentally changes the item, it is treated as a new good and the Scheme does not apply.

3.2 Antiques

Goods that are more than 50 years old, typically including artwork, furniture, or valuable collectibles.

Resellers must retain evidence confirming:

The age of the item, and
That VAT was previously imposed.

3.3 Collectors’ Items

Items of scientific, historical, archaeological, or collectible value, including:

Stamps
Coins
Currency
Rare artefacts

Objective evidence of both collectible status and prior VAT exposure is required.

4. Eligible Transactions

The Scheme applies in two primary situations:

4.1 Purchases from Non-Registrants or PMS Sellers

A reseller may apply the Scheme when:

Goods are purchased from a non-registered person, or
Goods are purchased from a VAT-registered supplier who applied the Scheme.

However, goods acquired before VAT implementation (pre-1 January 2018) or goods never subject to VAT are excluded.

4.2 Article 53 Goods (Blocked Input Tax)

The Scheme can also apply to goods where input VAT recovery was blocked, such as:

Motor vehicles available for private use
Entertainment-related assets

This category is not limited to eligible goods and applies broadly where Article 53 input tax restrictions exist.

5. Importation and the Profit Margin Scheme

The Scheme does not apply to goods imported by the reseller where:

Import VAT is recoverable under normal rules

However, if import VAT is not recoverable under Article 53, the Scheme may apply upon resale.

6. Option to Apply the Scheme

Key points:

The Scheme is optional and may be applied per transaction
No prior FTA approval is required
Once a tax invoice shows VAT explicitly, the Scheme cannot be applied

When applying the Scheme, the reseller must:

Issue a tax invoice stating that VAT is charged under the Profit Margin Scheme
Not disclose the VAT amount on the invoice
Maintain all required records and reporting disclosures

7. Calculation of VAT Under the Scheme

Step 1: Calculate the Profit Margin

Profit Margin = Selling Price – Purchase Price
(The margin is VAT-inclusive)

Purchase Price includes:

Price paid to acquire the good
Associated costs (e.g. transport, installation)

Selling Price includes:

Total consideration for the good
Ancillary items directly linked to the sale

Step 2: Calculate VAT

VAT is calculated using the VAT fraction:

VAT = Profit Margin × (5 / 105)
(or simply Profit Margin ÷ 21)

Goods Sold at a Loss

No VAT is due if no profit is realised
Losses cannot be offset against profits on other goods

8. Record-Keeping Requirements

Resellers applying the Scheme must maintain:

A stock book or similar register
Purchase invoices or self-issued purchase records (for non-registrant purchases)
Evidence that goods were previously subject to VAT

For purchases from non-registrants, the reseller must issue a document capturing:

Seller and reseller details
Description of goods
Date and consideration
Seller’s signature

9. Invoicing Requirements

When applying the Scheme:

The tax invoice must state that VAT is charged under the Profit Margin Scheme
The VAT amount must not be shown
All other mandatory tax invoice details must be included

Issuing an invoice that separately shows VAT invalidates the use of the Scheme for that transaction.

10. VAT Return Reporting

Election in VAT Return

VAT Return Form 201 includes a checkbox confirming whether the Scheme was applied.

Box 1 – Sales

Amount column: Selling price less VAT included in the margin
VAT column: VAT calculated on the profit margin

Box 9 – Purchases

Purchase price of goods intended for resale under the Scheme
No VAT amount reported

Reporting must be done by Emirate, based on the establishment most closely connected to the supply.

XB4 Commentary

The new VATGPM1 Guide provides long-awaited clarity on the Profit Margin Scheme, reinforcing documentation, eligibility, and reporting requirements. While the Scheme can offer significant VAT efficiencies, it also carries strict compliance obligations.

Businesses dealing in second-hand goods, assets with blocked input tax, or collectibles should: