Since being implemented in 2018, VAT has become a major frustration for car dealers in the UAE. Understanding the requirements for VAT can be complicated and making a mistake could cost you thousands.
What is VAT?
VAT or Value added tax is a UAE government tax imposed on goods and services. VAT is levied at the rate of 5%. Anytime a customer buys a vehicle from a dealership you may need to charge 5% VAT on top of the sale price and pay this to the government. If consumers buy a car directly from an individual on a one-time sale, then they are exempt from paying VAT.
How is Tax Calculated?
The 5% VAT tax can be calculated on the total profit margin of the sale of the vehicle if they are eligible to use the profit margin scheme. If VAT has not been charged previously, you may need to charge VAT on the full sale value.
Who does VAT affect?
All motor dealers are required to pay VAT on sale items. If you are operating or planning on operating a car dealership you will need to be VAT registered. Also, keep in mind that the mandatory registration threshold for VAT is when you reach annual revenues of over AED 375,000.
What is the VAT Profit Margin Scheme?
The VAT profit margin scheme is the tax differential of what your car sold for versus the price you paid for the car. When selling cars in the UAE you can choose to use the profit margin scheme to avoid the risk of being double taxed on your sale items.
For dealers who are purchasing a vehicle from a private seller with the intention of a resale, the dealer can account for VAT on the sale. You can reference the difference between the acquisition price and the selling price. The VAT must be reported by the registered purchaser in the profit margin on the sale of the vehicle.
The FTA (Federal Tax Authority) has confirmed that the taxable person i.e. the dealer is not able to apply the profit margin scheme in situations where they have issued a tax invoice referencing the amount of VAT.
To be eligible for the Profit Margin Scheme, the Vehicle should not be purchased from a person who is registered for VAT and VAT should have previously been paid on that vehicle.
The following documentation will also be required to be maintained:
- Stock record showing details of each good purchased and sold under the profit margin scheme.
- The detailed purchase invoices and information relating to the date that the vehicle was first manufactured, sold, or brought into use.
- Proof for the payment of VAT by the initial or first consumer.
Is there VAT on consignment?
Many car dealers are starting to sell cars on a consignment basis. This means that the actual ownership of the vehicle is not passed to the dealer but rather transferred directly to the buyer. In this situation, the dealer is searching for a buyer of the vehicle on behalf of the seller for a commission. In this scenario, VAT would be charged on the commission and not the full price. However, we recommend that you seek advice from a tax agent to ensure that your documentation and sales process complies with VAT. Failure to do so could result in VAT being liable for the entire deal value rather than just the commission.
How is VAT paid?
Dealers will need to submit a VAT return via the Federal Tax Authority e-services portal. The VAT return is a formal business document that specifies the details of the VAT of the dealership. VAT is submitted online only. There is no option to submit VAT via paper or printed documents. Payment and submission must be made within 28 days of the end of the VAT quarter.
How often do you need to pay VAT?
VAT can be submitted to the Federal Tax Authority per quarter (3 months) or every month.
What are the penalties for not submitting VAT?
Failing to submit the required VAT results in a 10,000 AED fine for the first time. For a repeat violation, you will be fined 50,000 AED.
Easy Cars is a car dealer software with the in-built capability to automate VAT calculations and sync to the accounting platform Xero for seamless accuracy. EasyCare manages the entire day-to-day operations for car dealers so they can focus on growing leads and sales.
This article is written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of its contents.