Since its introduction in 2018, VAT has become a source of frustration for UAE car dealers. Understanding VAT is complicated and making a mistake could be expensive. VAT is a relatively new 5 percent tax levied by the UAE government on the sale of goods and services.
(1) Impact of VAT on Car Dealerships
Value Added Tax (VAT) is a tax imposed on the import and supply of Goods and Services, including the sale of new and second-hand vehicles. VAT is imposed at each stage of purchase and sale. The standard rate of VAT is 5%, though some supplies are zero-rated (the rate of VAT is 0%) or exempt (VAT does not apply).
Car Dealers registered for VAT:
- May reclaim any VAT expenses incurred on goods and services for their business.
- Charge VAT on taxable services and goods.
- Keep business records to ensure compliance with government regulations.
As special rules apply to second-hand goods, the rules must be fully understood and followed explicitly, or penalties will be given.
(2) Do Motor Dealers Need to be VAT Registered?
All motor dealers that have an annual turnover exceeding AED 375,000 must be registered for VAT and are obligated to pay VAT on a vehicle sale.
(3) How Does the VAT Profit Margin Scheme Work?
The Profit Margin Scheme applies to second-hand vehicles where VAT has previously been charged on the vehicle, provided it is purchased from:
- A person who is not registered for VAT and has documented evidence to prove VAT was previously paid.
- A person who is registered for VAT and who provides you with a Tax Invoice that states that the VAT was charged with reference to the profit margin.
Under this scheme, VAT is calculated only on your profit when you sell the vehicle. You must be confident that the vehicle has previously been subject to VAT in order to apply the Profit Margin Scheme. You must also have a signed Purchase Invoice for all vehicles purchased under the Profit Margin Scheme. If the seller is not registered for VAT, you can create a Purchase Invoice on their behalf and ensure the seller signs the invoice.
(4) Do Consignments Qualify for VAT?
What is a consignment? A consignment is a vehicle that is left with the dealer to be sold on the owner’s behalf.
With a consignment, the ownership of the vehicle is retained by the owner until the vehicle is sold. Only then will ownership be transferred to the new car buyer.
VAT implications for supplies made through an agent (in this case the dealer) is covered in Article 9 of the UAE VAT law. An agent may be anyone who supplies goods or services on behalf of a principal (consignor, owner of the vehicle), either as:
- disclosed agent: supply by the consignor for the consignor's benefit; or
- undisclosed agent: supply by the agent and for the agent's benefit
If you acquire a vehicle as a consignment, the EasyCars software will treat the sale as a supply via a "disclosed agent". When the vehicle is sold, a "disclosed agent" must issue an invoice to the buyer on behalf of the consignor. This invoice can be generated automatically from the EasyCars software. The invoice will calculate the correct VAT as described below.
When you acquire a vehicle on consignment, your commission will be the difference between the 'Acquisition Cost' and the 'Selling Price'.
Note: The Car Dealer is always liable for 5% VAT on the commission earned when the vehicle is sold
The VAT on the invoice to the buyer (if any) depends on the whether the consignor is registered for VAT:
- If the consignor is registered for VAT and would charge VAT if selling the vehicle themselves (eg if the vehicle is consigned by another caryard), the invoice to the buyer should include VAT because you are selling on behalf of a consignor who has to collect VAT on the sale.
- The consignor is responsible for remitting the VAT collected.
- If the consignor is not registered for VAT, No VAT should be shown on the invoice. The invoice to the buyer will not include any VAT because you are selling on behalf of a consignor who is not obliged to collect VAT.
Once the vehicle is sold, you are liable to pay VAT on the commission you have earned on your commission (the difference between the Acquisition Cost and the Selling Price).
How is VAT Paid?
Dealers must submit a VAT return through the e-services portal of the Federal Tax Authority. This is a formal business document detailing the amount of VAT calculated for your dealership. It is submitted online only without any option to submit physically through any printed or paper documents. Submission and payment should be made within 28 days once each VAT quarter ends.
VAT can be submitted quarterly or monthly, quarterly being the most common selected option. Failure to submit VAT results in an AED 10,000 penalty for first-time offenders. Repeat offenders will have to shell out AED 50,000 for every subsequent offence.
How EasyCars Can Help?
EasyCars is a revolutionary car dealer software that automates the buying and selling of motor vehicles in the UAE.
EasyCars automatically calculates dealer VAT, syncs to accounting platform Xero and provides valuable reports so you can always stay compliant. With EasyCars, you no longer need to worry about common VAT errors or manual calculations.
This article has been created thanks to contributions from Rayhan Aleem and Michael Jeal.
Rayhan is the Managing Partner at Alpha Pro Partners, a Xero-certified accounting firm based in Dubai. Rayhan is experienced at providing expert advice to start-ups and small to medium businesses to help them optimize their operations and finances.
Disclaimer: This article is general and cannot be used for specific situations. It is the opinion of the author only. We recommend you get professional accounting and tax advice before acting on its contents.