### The Calculation of Value Added Tax under the Profit Margin Scheme

We have previously discussed the Profit Margin Scheme and the specific supplies that are eligible to be supplied under this scheme. In this article, we will look at how to calculate the profit margin and tax invoice that must be paid when using the Profit Margin Scheme.

How is the Profit Margin Determined?

The profit margin is calculated as the difference between the purchase price and the selling price of the goods. It is the seller’s markup on the goods.

Calculating VAT Return uae under the Profit Margin Scheme

The profit margin is considered to already include tax. Therefore, to determine the VAT Registration amount, the tax must be backed out of the profit margin.

The following formula can be used:

VAT Amount = Value including tax * tax rate / (100 + tax rate)

Let’s look at some examples to understand how to calculate the profit margin and VAT Registration uae.

Example: Purchasing Goods from an Unregistered Person

Say a VAT-registered used car dealer, Ahmed Used Cars, buys a used car from a consumer, Mr. Juman, for AED 10,000. After repairs and refurbishing, Ahmed Used Cars sells the car to another consumer, Mr. Rohan, for AED 15,000.

If Ahmed Used Cars uses the margin scheme for this sale, the profit margin is:

AED 5,000 (Purchase price – Selling price) – AED 10,000

Since the profit margin includes tax, the VAT Registration can be calculated:

Value including tax = AED 5,000

Tax rate = 5%

Therefore, VAT amount = 5,000 * 5 / (100 + 5) = AED 238

For used goods dealers, the Profit Margin Scheme allows them to pay VAT dubai only on the profit margin earned on the sale. This is useful when purchasing used goods from end consumers, where input tax recovery is not available. However, the dealer must ensure they have not recovered input tax invoice format when purchasing these goods.

You can also Register for VAT Registration on our website:

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