Is VAT charged on the sale of a used car?

Article 43 - Charging Tax based on Profit Margin 1. The Registrant may, in any Tax Period, calculate and charge Tax based on the profit margin earned on the Taxable Supplies as specified in the Executive Regulation of this Decree-Law and not based on the value of these supplies, and shall notify the Authority of the same. 2. The Executive Regulation of this Decree-Law shall specify the conditions to be met for the application of the provisions of this Article. Title Six - Zero Rates and Exemptions Chapter One – Zero Rate

3. Sale of used/ pre-owned cars The sale of used cars is also subject to VAT at 5%, provided the sale is made by a VAT registered supplier. The implications relating to the date of supply, invoicing obligations and payment of tax as discussed in section 2.1 above apply similarly to the sale of used cars. Further, the implications regarding price displays apply similarly to used cars as well – irrespective of whether the VAT is accounted for on the full sales value of the car or in accordance with the Profit Margin Scheme as discussed below. A key difference between the VAT implications for the sale of new cars and the sale of used cars is the possibility of accounting for VAT using the Profit Margin Scheme which is available to motor vehicle dealers trading in used cars. 3.1. Profit Margin Scheme In accordance with the Profit Margin Scheme6, a VAT registered supplier can account for VAT on the basis of the profit earned on taxable supplies instead of accounting for VAT on the value of such supplies. In other words, under the Profit Margin Scheme, VAT can be accounted for on the difference between what was paid for a good at the time of purchasing it and what was charged to the customer at the time of selling it. Amongst other things, the Profit Margin Scheme can also be used to account for VAT when selling used cars. It is important to note that applying the Profit Margin Scheme is optional. The rationale for the Profit Margin Scheme and the conditions which must be met for applying the scheme are discussed below. 3.1.1. Rationale for the Profit Margin Scheme The Profit Margin Scheme is intended to avoid the cascading of taxes. The cascading effect arises where a motor vehicle trader purchases a used car from a non-registered seller or from a seller who also accounted for VAT by reference to the Profit Margin Scheme and consequently the motor vehicle trader is not able to recover the VAT embedded in the price of the car. The Profit Margin Scheme seeks to avoid this cascading issue by permitting the motor vehicle trader to account for VAT only on the profit earned on the supply. 6 Article 43 of the Decree-Law and Article 29 of the Executive Regulation. Automotive Sector | VAT Guide | VATGAM1 9

4.3. Goods sold at loss or no profit No VAT is due under the Scheme if the Good is sold at loss or no profit is realised. Losses incurred on the sale of a Good can also not be set off against profits on another supply of a Good. Example – Goods sold at a loss/break-even Company N, a used car dealer, sold four cars in Q1 2025 and applied the Scheme on all of them. The Profit Margin and related VAT are as follows: CaCar### Car 1 Car 2 Car 3 Car 4 Total Selling Price (AED) Purchase Price Profit Margin VAT (AED) (AED) (AED) 10,000 20,000 25,000 5,000 60,000 5,000 10,000 25,000 20,000 60,000 5,000 10,000 (15,000) - 238.10 476.19 714.29 Although Company N has not made a profit in Q1 2025, it still has to account for VAT on the two cars that were sold at a profit, i.e. AED 714.29. As Cars 3 and 4 were not sold for a profit, no Output Tax should be reported in respect of these supplies. The loss made on the supply of Car 4 may not be setoff against the profits made on the supplies of Cars 1 and 2. VAT Guide | Profit Margin Scheme | VATGPM1 16