FTA: Eligible goods for VAT based on profit margin
The Federal Tax Authority (FTA) has determined three main categories of “eligible goods” for calculating Value Added Tax (VAT) on the basis of the profit margin scheme, namely: Second-hand goods, meaning tangible moveable property that is suitable for further use as it is or after repair; Antiques, i.e. goods that are over 50 years old; and Collectors’ Items, such as stamps, coins, currency and other pieces of scientific, historical or archaeological interest.
The Authority asserted that only those goods, which had been subject to VAT before the supply in question, may be subject to the profit margin scheme. The profit margin is defined as the difference between the buying and selling price of an item and is inclusive of taxes.
The announcement was made in a “Public Clarification” about eligible goods under the profit margin scheme, as per Federal Decree-Law No. (8) on Value Added Tax. The FTA offers the public clarifications service through its website in an effort to raise tax awareness among businesses in the UAE and promote auto-compliance with tax regulations. The service can be accessed on: https://www.tax.gov.ae/en/public-clarifications.aspx
The Federal Tax Authority urged suppliers to be confident that a good has previously been subject to tax in order to apply the profit margin scheme.
Evidence or information of this status could include (but is not limited to): Information relating to the date the good was first manufactured, sold or brought into use, e.g. in the case of a car, the date the car was first registered would indicate its sale would have been subject to VAT if it was registered on a date after January 1, 2018; and evidence that the supplier paid VAT on their original purchase, e.g. by asking the supplier for a copy of the tax invoice relating to their purchase of the good.
In a press statement, the FTA called on registered businesses to carefully verify eligible goods for the profit margin scheme, reiterating that only those goods which have previously been subject to VAT before the supply in question may be subject to the scheme. As a result, stock on hand of used goods that were acquired prior to the effective date of Federal Decree-Law No. (8) on VAT, or goods that have not previously been subject to VAT for other reasons, are not eligible to be sold under the profit margin scheme. VAT is, therefore, due on the full selling price of these goods.
The Authority went on to explain that a registered business may apply the profit margin scheme to eligible goods in the following circumstances: If the goods were purchased from either a person who is not registered for VAT or a Taxable Person who calculated VAT on the supply by reference to the profit margin, i.e. a VAT-registered business that already applied the profit margin scheme on the same goods; or in case the Taxable Person made a supply of goods where input tax was not recovered in accordance with Article 53 of Cabinet Decision No. (52) of 2017.
A Taxable Person will not be allowed to apply the profit margin scheme in cases where they had issued a tax invoice or any other document mentioning an amount of VAT chargeable in respect of the supply, the FTA explained, noting that Taxable Persons are required to keep inventory and similar documents that clarify the situation of every item bought or sold, as well as purchase invoices that outline the details of items bought under the profit margin scheme. If these items were bought from an unregistered Person, the Taxable Person is required to issue a self-invoice demonstrating the purchase details.
The Federal Tax Authority concluded its statement by clarifying that if the registered business imposed tax on a certain supply using the profit margin scheme, then said business would be required to issue a tax invoice explicitly stating this fact, along with all other information that is supposed to be included in an invoice, except the tax amount.