What is the profit margin scheme?
The profit margin scheme is a method of VAT calculation for certain goods. Under this scheme, you can calculate VAT based on the profit margin rather than the total value of the sale. This scheme was introduced to avoid double taxation on second-hand goods. The products eligible for the profit margin scheme are mostly second-hand goods, on which tax has already been paid. When a buyer or dealer purchases from an unregistered person, they don’t pay tax, so there is no input tax to recover. Therefore, while selling these second-hand goods, the dealer shouldn’t have to pay tax for the full sale price. This is where the profit margin scheme is beneficial, as it allows sellers to pay VAT only on the profits made on the supply.
For example, if a second-hand car dealer sells a pre-owned car to a customer, then the dealer calculates VAT based on the profit margin and not on the sale value.