VAT on Used Cars and Secondhand Goods

Introduction

With the growing popularity of the second-hand market in the UAE—especially for used cars, electronics, furniture, and luxury items—businesses and consumers must understand how Value Added Tax (VAT) applies to these transactions. The Federal Tax Authority (FTA) has issued specific guidelines to ensure that VAT is applied correctly and fairly in the resale of second-hand goods.

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1. Is VAT Applicable on Used Goods?

Yes. VAT is generally applicable at 5% on the sale of used goods, including pre-owned cars, provided the seller is a VAT-registered person and the supply occurs as part of a business activity.

However, there are two ways VAT can be calculated:

• Standard VAT Method

• Profit Margin Scheme (optional, but subject to conditions)

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2. Standard VAT Method for Used Goods

Under this method, VAT is calculated at 5% on the full selling price of the item, just like any other new good.

Example:

• Selling price of a used car: AED 50,000

• VAT (5%): AED 2,500

• Total invoice: AED 52,500

This method is typically used when the input VAT on the purchase of the used good was recoverable.

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3. Profit Margin Scheme for Secondhand Goods

To avoid double taxation, the Profit Margin Scheme allows VAT to be charged only on the profit made on the sale, not on the total selling price. This scheme is allowed for:

• Secondhand goods (e.g., used cars, electronics, furniture)

• Antiques

• Collector’s items

✅ Conditions to Use the Profit Margin Scheme:

• The item was acquired without input VAT recovery (e.g., from an unregistered individual).

• The goods are eligible under the scheme (used, tangible, movable, and suitable for reuse).

• Proper documentation and record-keeping are maintained.

🔁 How It Works:

Profit = Selling Price – Purchase Price

VAT = 5% of the Profit

Example:

• Purchase price of used car: AED 40,000

• Selling price: AED 50,000

• Profit: AED 10,000

• VAT = 5% of AED 10,000 = AED 500

• Total invoice: AED 50,000 (includes AED 500 VAT)

Note: No VAT is shown separately on the invoice if the Profit Margin Scheme is used.

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4. VAT on Used Cars – Special Focus

• Dealers registered for VAT must apply VAT to all sales.

• If the car was acquired from a VAT-registered business with input VAT recoverable, use standard VAT method.

• If the car was acquired from an individual (not VAT-registered), you can use the Profit Margin Scheme.

• Private individuals selling used cars are not required to charge VAT.

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5. Invoice Requirements

If using the Standard VAT Method:

• Must issue a Tax Invoice showing the VAT amount.

If using the Profit Margin Scheme:

• Must issue an invoice but should not show VAT separately.

• The invoice must include a note:

"VAT charged on the profit margin in accordance with Cabinet Decision No. 52 of 2017.”

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6. What Happens If Conditions Aren’t Met?

If a business uses the Profit Margin Scheme without fulfilling conditions, the FTA may disallow the scheme and require VAT to be paid on the full selling price, including penalties for non-compliance.

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7. VAT Recovery for Buyers

• Businesses buying used goods under standard VAT method can recover input VAT (if used for taxable supplies).

• Buyers cannot recover VAT if the seller used the Profit Margin Scheme, as no VAT is shown separately.

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8. Record-Keeping Obligations

Businesses must maintain:

• Purchase and sales invoices

• Details of how goods were acquired

• Calculations of profit margin

• Inventory records of second-hand stock

These records must be kept for at least 5 years in case of FTA audits.

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Conclusion

VAT on used cars and second-hand goods in the UAE is straightforward if the rules are followed. The Profit Margin Scheme offers significant relief to second-hand dealers by avoiding double VAT—but using it requires careful documentation and compliance with FTA rules. For consumers, it's important to understand the invoice details and whether VAT has been applied properly.

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📌 Need Help with VAT Compliance for Used Goods?

Sheikh Anwar Accounting & Auditing LLC offers expert VAT consultancy for car dealers, second-hand retailers, and businesses involved in resale. Get in touch today to ensure your VAT practices are compliant and cost-effective.

📧 info@sa-auditors.com

🌐 www.sa-auditors.com