Margin Scheme
The margin scheme allows dealers in second-hand goods to account for VAT only on the margin (the difference between the purchase price and sale price), not on the full sale price.
Purpose
The margin scheme prevents double taxation and cash flow issues:
- Without the margin scheme, a dealer would charge 5% VAT on the full sale price but cannot recover input tax (the original seller is often a consumer who didn't charge VAT).
- With the margin scheme, VAT is charged only on the dealer's profit margin.
Eligible Goods
- Second-hand goods (used items purchased for resale)
- Antiques
- Used cars and vehicles
- Used electronics and equipment
The goods must be purchased from a person who is not a registered taxable person (typically a consumer) or from another dealer under the margin scheme.
How the Margin is Calculated
Margin = Sale price − Purchase price
VAT = Margin × 5/105 (VAT is included in the margin)
Conditions
- The dealer must be a registered taxable person.
- The goods must be second-hand (used).
- The goods must have been purchased from a non-registered person (or under margin scheme).
- The dealer must maintain records of purchase and sale prices.
- The dealer must elect to use the margin scheme in its VAT return.
What is NOT Eligible
- New goods
- Goods purchased from a registered supplier who charged VAT (input tax can be recovered normally)
- Services
- Goods purchased for personal use
Worked Example
A used car dealer buys a car from a consumer for AED 50,000 (no VAT). The dealer sells it to a customer for AED 60,000. Under the margin scheme:
- Margin = AED 60,000 − AED 50,000 = AED 10,000
- VAT = AED 10,000 × 5/105 = AED 476.19
- The dealer accounts for AED 476.19 output tax.
Without the margin scheme, the dealer would charge 5% on AED 60,000 = AED 3,000 VAT (with no input tax to recover).