EXECUTIVE SUMMARY

The Federal Tax Authority has released its first comprehensive guide on the Profit Margin Scheme (VATGPM1), effective January 2026. This optional mechanism allows VAT-registered resellers to account for VAT on the profit margin rather than the full selling price for eligible goods—eliminating VAT cascading on second-hand goods, antiques, and collector’s items.

Scope & Eligibility

The scheme applies to the resale of second-hand goods, antiques (over 50 years), collector’s items, and certain Article 53 goods where input VAT recovery was blocked. Eligibility is strictly limited to goods that were previously subject to VAT, typically acquired from non-registrants or suppliers applying the scheme.

Eligible Goods (Three Categories)

Mechanism & VAT Computation

VAT under the scheme is calculated only on the profit margin, using the 5/105 fraction, treating the margin as VAT-inclusive. Each transaction is assessed independently, and loss-making or break-even sales do not attract VAT, with no cross-offset of losses permitted.

Critical Implications:

Background & Regulatory context

Legislative Framework

What’s New?

This is not a legislative amendment—Article 29 has existed since 2017. However, until now:

• No consolidated FTA guidance on practical application

• Ambiguity on record-keeping standards for purchases from non-registrants

• Unclear VAT return reporting methodology for loss-making transactions

• Limited clarity on Article 53 Goods eligibility (blocked input tax scenarios)

VATGPM1 provides:

✓ Step-by-step calculation methodology

✓ Definitive invoicing and record-keeping requirements

✓ VAT return box-by-box reporting instructions

✓ 12 worked examples covering edge cases

VAT Return Reporting

Registrants applying the scheme must explicitly elect the option in the VAT return and report selling prices and VAT amounts in the prescribed boxes. Purchase prices are reported separately without VAT, reinforcing transaction-level traceability.

Risk & Audit Implications

The guidance signals a clear shift toward evidence-based audits, with particular focus on eligibility proof, margin calculations, and invoice compliance. Errors may result in denial of the scheme and reassessment of VAT on the full selling price, along with applicable penalties.

PENALTIES & COMPLIANCE RISKS

While VATGPM1 does not specify scheme-specific penalties, standard VAT Law and Tax Procedures Law penalties apply:

CONCLUSION & STRATEGIC TAKEAWAYS

Key Insights

1. Clarification, Not Change: VATGPM1 operationalizes existing law—no new tax burden, but compliance standards elevated.

2. Administrative Trade-Off: Tax savings (up to 52% in examples) offset by enhanced record-keeping—viable only with robust systems.

3. Evidence is King: No documentary proof of prior VAT = No Scheme—this will be FTA’s primary audit focus.

4. Loss Treatment: Cannot pool profits/losses across transactions—each good is a separate supply for VAT purposes.

5. Invoice Discipline: Issuing a tax invoice showing VAT amount irreversibly forfeits Scheme election for that transaction.

Recommended Position

✅ ADOPT SCHEME IF:

• ≥60% purchases from non-registrants

• Positive contribution margin per transaction

• ERP capable of dual-stream inventory tracking

• Strong document retention culture

❌ REJECT SCHEME IF:

• Unable to evidence pre-2018 acquisitions

• Import-reliant model (input tax benefit lost)

• Administrative cost exceeds tax savings

• High audit risk tolerance threshold

Disclaimer

This newsletter is intended solely for general informational and educational purposes. It summarises the Federal Tax Authority’s VAT Guide on the Profit Margin Scheme (VATGPM1 – January 2026) and the applicable provisions of UAE VAT legislation as in force at the date of publication. It does not constitute legal, tax, accounting, or professional advice, nor should it be relied upon as such.

The application of the UAE VAT Profit Margin Scheme depends on the specific facts, circumstances, and documentation of each transaction. Tax positions may vary based on interpretation, subsequent guidance issued by the Federal Tax Authority, or changes in law and practice. Readers are advised to obtain independent professional advice before implementing the Profit Margin Scheme or taking any action based on the contents of this article.

Neither the author nor the firm accepts any responsibility or liability for any loss arising from reliance on this publication without appropriate professional consultation.

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