The Profit Margin Scheme (PMS) is a special VAT mechanism in the UAE that allows eligible resellers to calculate VAT only on their profit margin, rather than on the full selling price of goods. This scheme is particularly beneficial for businesses dealing in second-hand goods, used vehicles, antiques, and collectors’ items, where VAT may have already been charged earlier in the supply chain.
The main purpose of the Profit Margin Scheme is to prevent VAT cascading, where tax is charged repeatedly on the same item without the ability to recover input VAT.
At Books Managers, we help businesses apply this scheme correctly to reduce VAT exposure while remaining fully compliant.
What Is the Profit Margin Scheme?
Under the Profit Margin Scheme, VAT is calculated on the difference between the selling price and the purchase price of eligible goods.
Instead of paying VAT on the total sales value, the reseller pays VAT only on the value they added, making this scheme highly effective for resale-based businesses.
Eligibility Criteria for the Profit Margin Scheme
To apply the Profit Margin Scheme, strict eligibility conditions must be met.
Eligible Goods
The scheme applies only to:
- Second-hand goods (tangible movable property suitable for further use)
- Antiques (items more than 50 years old)
- Collectors’ items (such as stamps, coins, and similar collectibles)
Goods outside these categories are not eligible.
VAT Condition
The goods must have been previously subject to VAT within the supply chain.
- Goods acquired before 1 January 2018 (UAE VAT implementation) are generally not eligible, unless evidence proves VAT was previously charged.
- Goods purchased from private individuals or non-VAT registrants usually qualify, as VAT could not be reclaimed.
Eligible Purchase Transactions
The scheme can be applied if goods were purchased from:
- A non-VAT registered person (e.g., a private individual)
- Another VAT-registered reseller applying the Profit Margin Scheme
- A supplier where input VAT recovery was blocked, such as under Article 53 (e.g., vehicles used for private purposes)
How VAT Is Calculated under the Profit Margin Scheme
VAT Calculation Formula
VAT = Profit Margin × (5 ÷ 105)
Profit Margin Definition
Profit Margin = Selling Price – Purchase Price
The purchase price may include directly attributable costs such as:
- Transportation
- Installation
- Capitalized refurbishment costs
Key Calculation Rules
- The profit margin is VAT-inclusive
- VAT is calculated item by item
- Losses on one item cannot be offset against profits on another
Treatment of Losses and Break-Even Sales
- If an item is sold at cost or at a loss, no VAT is payable
- Losses cannot reduce VAT due on profitable sales
- Each resale transaction is assessed independently
Invoicing Requirements under the Profit Margin Scheme
Tax Invoice Rules
When using the scheme:
- The invoice must state that VAT is charged under the Profit Margin Scheme
- The VAT amount must not be shown
- This prevents disclosure of profit and blocks input VAT recovery by the buyer
Record-Keeping Obligations
Resellers must maintain:
- A detailed stock register for goods under the scheme
- Purchase records proving the item was previously taxed
- Clear linkage between purchase price, selling price, and margin
Proper documentation is essential during FTA audits.
Practical Examples
Example 1: Used Car Resale at a Profit
A dealer buys a used car from a private individual for AED 100,000 and sells it for AED 200,000.
- Profit Margin: AED 100,000
- VAT Due: AED 4,761.90
Example 2: Blocked Input VAT Scenario
A company purchases a car for AED 500,000 + AED 25,000 VAT for private executive use (VAT blocked). The car is later sold for AED 530,000.
- Purchase Price (PMS): AED 525,000
- Profit Margin: AED 5,000
- VAT Due: AED 238.10
Example 3: Loss Does Not Offset Profit
A dealer sells:
- Car A with a profit of AED 10,000
- Car B with a loss of AED 15,000
VAT is payable only on Car A:
- VAT Due: AED 476.19
- Loss on Car B does not reduce VAT payable
Why the Profit Margin Scheme Is Important
Correct use of the scheme:
- Reduces VAT overpayment
- Improves pricing competitiveness
- Enhances cash flow
- Prevents VAT cascading
- Strengthens audit defensibility
Incorrect application, however, may result in penalties, reassessments, and compliance risks.
How Books Managers Can Support You
At Books Managers, we assist businesses by:
- Assessing eligibility for the Profit Margin Scheme
- Reviewing resale transactions
- Implementing compliant invoicing and stock controls
- Supporting VAT filings and FTA audits
Conclusion
The Profit Margin Scheme is a powerful VAT relief for resellers—but only when applied correctly. With proper eligibility checks, accurate calculations, and strong documentation, businesses can significantly reduce VAT exposure while staying compliant.