The Profit Margin Scheme (PMS) is a VAT calculation method offered in some countries, including the UAE, that simplifies VAT compliance for certain businesses. This blog post will explain what the PMS is, how it’s calculated and managed, and how TFAB can assist businesses in utilizing this scheme effectively.
What is the Profit Margin Scheme?
The PMS allows eligible businesses to pay VAT only on their profit margin instead of the full sales value of their goods.
In the UAE, the Profit Margin Scheme (PMS) under VAT applies to businesses that sell specific goods. Here’s a breakdown of eligible businesses:
- Businesses Selling Second-Hand Goods: This includes any tangible moveable property that is suitable for further use as it is or after repair. This could include furniture, electronics, clothing, pre-owned cars, and more.
- Businesses Selling Antiques: For goods to qualify as antiques under the PMS, they must be over 50 years old. This could include artwork, jewelry, furniture, and other collectibles that meet the age criteria.
- Businesses Selling Collectors' Items: This category encompasses a wider range of items with historical, scientific, archaeological, or cultural significance. Examples include stamps, coins, historical documents, and rare books.
Important points to remember
- The eligibility for the PMS is solely based on the type of goods being sold. The nature of the business (sole proprietorship, LLC, etc.) doesn't impact eligibility.
- Businesses can only apply the PMS to the specific goods mentioned above. Any other goods sold by the business will be subject to VAT under the regular method (taxing the full sales price).
- You might need to maintain separate accounting records for PMS-eligible goods and non-eligible goods to ensure accurate VAT calculations.
How is VAT Calculated under the PMS?
Calculating VAT under the PMS involves a few steps:
- Track your sales and purchases: Maintain accurate records of your total sales and cost of goods sold (COGS) for all PMS-eligible goods.
- Calculate your gross profit margin: This is the difference between your sales and COGS, divided by your sales and multiplied by 100 (Gross Profit Margin = [(Sales - COGS) / Sales] * 100).
- Apply the VAT rate: Multiply your gross profit margin by the applicable VAT rate (currently 5% in the UAE) to determine your VAT liability.
How is VAT Calculated under the PMS?
Here’s an example
- Sales of PMS-eligible goods: AED 100,000
- Cost of goods sold: AED 60,000
- Gross Profit Margin: (AED 100,000 – AED 60,000) / AED 100,000 * 100 = 40%
- VAT Liability (assuming 5% VAT rate): 40% * 5% = AED 2,000
Managing the Profit Margin Scheme
- • Eligibility: Not all businesses qualify for the PMS. You'll need to check with FTA to determine eligibility criteria..
- • Record Keeping: Maintaining meticulous records of sales, purchases, and profit margins is crucial for accurate VAT calculations and compliance.
- • Separate Accounting: If you sell both PMS-eligible and non-eligible goods, you might need to maintain separate accounting records for each category.
How TFAB Can Help You with the Profit Margin Scheme
At TFAB, our VAT experts can assist you with navigating the complexities of the PMS:
- • Eligibility Assessment: We can help you determine if your business qualifies for the PMS and guide you through the application process.
- • Record-Keeping and Accounting: We can advise you on setting up a proper accounting system to track PMS-related transactions.
- • VAT Calculation and Reporting: Our team can ensure accurate VAT calculations under the PMS and assist with timely VAT filing.
- • Compliance Management: We can help you stay up to date with VAT regulations related to the PMS and manage compliance risks.
By partnering with TFAB, you can leverage the benefits of the PMS while ensuring you remain compliant with VAT regulations. Contact us today for a consultation and discover how our expertise can streamline your VAT management.