Profit Margin Scheme under VAT in UAE 2026: Eligibility, Calculation & VAT 201 Reporting

When products are sold multiple times, it becomes prone to being taxed more than the norm; this issue, in larger terms, is called VAT cascading. Applying tax on tax when a product is second-hand, or can be used and sold repeatedly, causes overtaxation; this is where the Profit Margin Scheme comes in handy. 

Under the profit margin scheme under VAT in the UAE, the actual gain is the only part subject to tax, which promotes fairness not only for the seller but also for the customer, who might otherwise be paying double tax and struggling with inflated prices. This system is particularly useful for second-hand products, antiques, and collector's items.

What is the Profit Margin Scheme in UAE VAT?

The profit margin scheme is an optional VAT mechanism in the UAE that allows the application of 5% taxes only on the profit margin, or in other terms, the actual gain, rather than the total value of the product, to stop cascading of VAT on resold products. When the tax is projected on the final selling price of a product, when it gets resold multiple times, the tax is added each time by previous sellers, so you end up paying tax on tax. 

The scheme allows sellers of resold products to pay taxes only on the profit of said product. This is extremely important for sellers as well as the end customers, including:

Sellers

• Pay tax only on profit, not the full price of the product 
• Can offer competitive prices without the liability of extra VAT 

Customers

• Lower prices, customers would be paying for the actual value, not the inflated tax 
• Encourages the sustainability of products, as well as the stability of resale businesses. 

When can you apply the scheme?

The profit margin scheme is restricted under certain eligibility criteria. When opting to apply PMS, it is crucial to make sure if his product meets these criteria. A few questions should be asked to be confident in the process, that includes: 

Is this item eligible for the Profit Margin Scheme (PMS)? 

It has to be one of the following scenarios: 

• Secondhand product, previously used. 
• Antique piece 
• Collectors item

Is the transaction eligible? 

The purchase of the product has to meet the criteria for a valid PMS application; you must have bought it from 

• A non-VAT registered person
• Someone is already applying PMS to his goods 
• A product in which input VAT was blocked under Article 53 of the VAT Executive regulation

Was it subjected to VAT before? 

IF: 

• VAT was accounted for at some point in the reselling of the product 
• The product normally has VAT applied to it 

A very important detail to know: You cannot apply PMS if you issue a VAT invoice showing VAT, as this negates the whole idea of PMS, and it would invalidate your product. 

How to calculate VAT under the Profit Margin Scheme 

Profit Margin scheme calculation 

To calculate the final VAT under the PMS system, you first need to calculate the Profit Margin using the following formula 

Profit Margin = Selling price - Purchase price 

The profit margin is the difference between the selling price that the customer has to pay and the purchase price that the seller paid beforehand. 

After calculating the profit margin, you need to calculate the VAT due on the profit margin using this formula

VAT = Profit margin × VAT fraction

Important note: the Profit Margin is already inclusive of VAT; the VAT fraction is used to calculate the VAT due. 

VAT fraction = Profit Margin/ 21 

In the following part, some scenarios on how to calculate the profit margin and the VAT. 

Scenario 1: 

Purchase price = 20,000 AED

Selling price = 25,000 AED 

First: Calculate the margin 

Margin = selling price - purchase price 

25,000 - 20,000  = 5,000

Second: Extract the VAT from the margin 

Fraction = Profit Margin/ 21

5000/ 21  = 238.0952

Third: Calculate your actual profit 

Profit excluding VAT 

5000 - 238.0952  = 4,761.905

Final result: 

Selling price is 25,000 AED 

VAT payable is 238.0952 

Net profit is 4,761.905 AED 

Goods sold at a no-profit/ loss sale: 

If the sale of a product didn’t result in a profit, or even resulted in a loss, that would mean no VAT is due under the scheme, as VAT in the PMS is calculated only on the profit. 

• No profit: 

Purchase price = 20,000 AED 

Selling price = 20,000 AED 

First: Calculate margin 

20,000 - 20,000  = 0

Second: Calculate VAT 

0/ 21  = 0

Final result 

VAT Payable = 0 

Profit = 0 

•  Loss: 

Purchase price  = 20,000.00 AED

Selling price = 15,000 AED 

First: Calculate margin 

15,000 - 20,000  = -5,000 AED 

Second: Calculate VAT 

VAT = 0

Daftra offers an accurate set of formulas and VAT calculators, including the Profit Margin Calculator, to ensure easy and successful tax calculations for your business in line with FTA laws.

Invoicing rules under PMS

VAT Invoices in the UAE under PMS are considered to have special requirements to comply with the law. 

When a customer purchases a product with PMS VAT, they pay the final price only; the VAT is hidden in the price because of the PMS. 

Which means when issuing the invoice, the seller must not show the VAT value separately, instead only show the final price with the VAT hidden in it. 

Here’s a list of what must be included in the invoice:

You must show: 

• Seller details
• Buyer details 
• Description of the product 
• Total price 

You must not show: 

• VAT amount 
• VAT rate  

The invoice under the PMS must include the standard invoice details, except for the VAT value or rate.

Record-keeping checklist

To apply for the Profit Margin Scheme VAT in the UAE, you, as a seller, must prove your compliance and eligibility for the PMS. 

To successfully apply the scheme, keep a record of the following: 

Stock book: 

• A record of the sold product under PMS that includes purchase price, selling price, and margin profit. 

Purchase invoices:

•  If the goods are purchased from a non-registrant, the reseller should keep evidence of the seller’s name, address, date of purchase, price, and signature. 

Proof that VAT previously applied: 

• The reseller must prove that VAT was already imposed by presenting old tax invoices or any proof that VAT was applied.

VAT Return Reporting

The seller under the profit margin scheme must inform the FTA that he has opted to account for VAT with reference to the scheme via the VAT 201 return form. Follow this guide: 

1. Select PMS in VAT return

Choose the profit margin scheme in VAT 201 to inform the FTA that you are applying for PMS. 

2. Report sales in box 1 

Selling price minus VAT on the profit margin. 

VAT calculated on the margin only.

3. Report purchases in box 9 

Purchase price only, VAT column is zero. 

Scenario 2:

First: Calculate margin: 

Margin = 25,000 - 20,000 = 5,000 AED 

Second: Calculate VAT on the margin 

5,000 / 21 = 238.0952 AED 

Third: Fill VAT 201 

Box 1 (sales)

Amount of VAT: 

25,000 - 238.0952 = 24,761.905

Box 9 (purchase)

Amount = 20,000 AED 

VAT = 0

Common Mistakes

The most crucial part of VAT is the compliance with the FTA laws; the same goes for the profit margin scheme application. It demands complete transparency and compliance to ensure its validity. This table presents some common mistakes when applying for PMS: 

FAQs: Profit Margin Scheme under UAE VAT

Can I claim VAT back on margin scheme purchases?

No. Products under the margin scheme are subjected to VAT only on the profit.

How to avoid paying VAT twice when reselling used goods?

In case of VAT-registered businesses, you can apply for the profit margin scheme. 

What is the VAT limit for the margin scheme? 

There is no limit for the profit margin scheme in the UAE, only eligibility requirements that have to be met. 

Does the UAE Profit Margin Scheme apply to all used goods?

No. The profit margin scheme is valid only for eligible goods according to the legal requirements that include the item being secondhand, antique, or previously subjected to VAT.

What if I accidentally showed VAT on the invoice while applying PMS?

You must issue a credit note to cancel the incorrect invoice and replace it. 

Conclusion 

The profit margin scheme in the UAE offers a fair way to stop VAT cascading by applying taxes only on the actual profit of secondhand products. However, it is compulsory to follow the criteria of eligibility to validate your application for PMS. It also demands strict compliance with the invoicing, reporting, and calculations of VAT set by the FTA. 

By maintaining proper records and following VAT 201 requirements, businesses can confidently apply for the PMS with full compliance with UAE VAT regulations.