VAT ELIGIBILITY ON PROFIT MARGIN SCHEME

VAT ELIGIBILITY ON PROFIT MARGIN SCHEME

INTRODUCTION

The Federal Tax Authority has issued a VAT Public Clarification VATP002 which specify the details of the goods eligible for applicability of profit margin scheme. This has been issued to help the business so that they can properly identify those goods which can be sold under the profit margin scheme in context of the transitional periods in which the second hand goods were not subject to VAT prior its implementation in UAE. This clarification while having general application and providing assistance on how to apply law also deals with all possible types of transactions and also states as to how should they be addressed.

WHAT IS A PROFIT MARGIN SCHEME?

Before proceeding further, we should first understand as to what does profit margin scheme means. This is a scheme in which a taxable person can calculate tax on the profit margin which is earned on a supply instead of the sale value.  

GOODS ON WHICH PROFIT MARGIN SCHEME IS APPLICABLE

  • The second hand goods which includes tangible moveable property that is suitable for further use as it is or after repair
  • Antiques i.e the goods that are over 50 years old
  • Collector’s items i.e. stamps, coins, currency and other pieces of scientific, historical or archaeological interest

Are eligible to be :

  • supplied under the profit margin scheme and 
  • would be subject to the scheme

provided that they were subject to VAT before supply

CONDITIONS TO QUALIFY FOR PROFIT MARGIN SCHEME

This scheme however allows for accountability of VAT by the second hand dealers on the profits that are made only on the supply and not on the whole value. However,

The goods are required to be purchased from either :

  1. A person who is not registered for VAT; or
  2. From a taxable person who has calculated VAT on the supply by reference to the profit margin i.e a VAT registered business which has already applied the profit margin scheme on the same goods

The taxable person has made supply of such goods on which no input tax has been recovered in accordance with Article 53 of the Cabinet Decision No 52 of 2017.

WHERE WOULD PROFIT MARGIN SCHEME NOT APPLY?

Taxable person would not be allowed to apply the profit margin scheme in cases where he has issued a tax invoice or any other document mentioning an amount of VAT which is chargeable in respect of supply.

APPLICABILITY OF THE SCHEME WITH RESPECT TO THE GOODS THAT HAVE BEEN PURCHASED PRIOR TO THE INTRODUCTION OF VAT

Article 29(2) of the Cabinet Decision No 52 of 2017 states that only the goods which have been subject to tax previously would be eligible to be sold under the profit margin scheme. Thus the goods which were ordinarily eligible under this scheme but were purchased during a period in which they would not have been subject to VAT are thus not eligible under this scheme.

YEAR WHEN THE GOOD WAS PURCHASED

STATE OF THE ORIGINAL PURCHASE

WOULD PROFIT MARGIN SCHEME BE APPLICABLE OR NOT

2017 or earlier

Original purchase was not subject to VAT

Good would not be sold under the profit margin scheme and VAT would be applied on the full selling price.

2018 or later

The original purchase is from a supplier who has not charged VAT on the supply and the goods have been purchased prior to the effective date of VAT

Good would not be sold under the profit margin scheme VAT would be applied to the full selling price unless there is an evidence to show that the goods have been subject to VAT on earlier supply

2018 or later

The original purchase is from a supplier and the goods have been purchased by the supplier in a period after the effective date of VAT

Goods would be eligible to be sold under the profit margin scheme where there is an evidence to show that the goods have been subject to VAT on an earlier supply

 

HOW TO CALCULATE PROFIT MARGIN ?

Profit margin is the difference between the purchase price of the goods and the selling price of the goods. Since it is inclusive of tax, the amount of tax which is to be paid is required to be back calculated from the amount of profit margin.

The formula is , Tax Amount = Value inclusive of tax* tax rate/ (100+tax rate)

For example : Azad Used Cars which is a VAT registered second hand goods dealer has purchased a used car from a consumer, Mr Jehangir for AED 10,000. After repairing and refurbishing, Azad Used Cars supplied the car to another consumer, Mr Rohan for AED 15,000.

Tax to be paid in case it opts for profit margin scheme is :

AED 15,000 - AED 10,000 = AED 5,000 (Selling price- purchase price).

The profit margin is inclusive of tax. Hence, the tax to be paid can be calculated as shown below: Value inclusive of tax = AED 5,000

Tax rate = 5%

Hence, tax amount= 5,000 * 5 / (100 + 5) = AED 238.

EVIDENCE TO SHOW THAT A GOOD WAS SUBJECT TO TAX PREVIOUSLY

In order to apply for this scheme, the supplier should be confident that the good has previously been subject to tax. Such evidence or information can include but is not only limited to :

  • Information that relates to the date when the good was first manufactured, sold or brought into use. For example : in the case of a car, the date when the car was first registered would indicate that its sale would have been subject to VAT if it was registered on a date after 1 January,2018
  • An evidence showing that the supplier has paid VAT on their original purchase. For example : by asking the supplier for a copy of the tax invoice relating to the purchase of the good

CONCLUSION

Thus the businesses that use the profit margin scheme have to ensure that they have sufficient and accurate records in place in order to identify those goods that are :

  • Supplied under the profit margin scheme
  • On which the business must account for VAT on the full selling price  

Furthermore the business must also review previous transactions in order to identify as to whether there is a risk that VAT has been under accounted for and if a voluntary disclosure is required or not.






 

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