Understanding VAT For Car Buyers in the UAE

Understanding VAT (Value Added Tax) in the UAE can seem very complex and confusing, especially when purchasing a car. However, being aware of the basic principles can help you, as a buyer, navigate these waters more effectively. In this article, we will answer some of the most common questions concerning VAT for used cars in the UAE, explain how it affects buyers, and provide additional details on exporting cars. We will also share a few important VAT key points for car buyers to remember.

What is VAT?

VAT is a general consumption tax that is applied to the majority of transactions for goods and services. Simply put, VAT is the added value you, as a buyer, have to pay in addition to the original price of the goods or the service you are purchasing or receiving. In the UAE, VAT was introduced in 2018 at a standard rate of 5%, which also applies to the automotive sector, including the sales of both new and used cars.

How Does VAT Affect Car Buyers?

Let's explore some technical details and important VAT implications you should know when purchasing a car in the UAE. It is essential that you familiarize yourself with how VAT applies to better anticipate the total cost and ensure you are aware of potential savings or limitations.

• VAT Inclusion in Prices: Typically, the price displayed by car dealers includes VAT. This is crucial for personal car buyers to know, as it affects the overall cost of the car. It's always a good idea to confirm with the dealer whether the displayed price includes VAT.
• VAT Rate and Price Display: The standard VAT rate of 5% applies to the sale of new and used cars. Prices displayed by dealers must be VAT-inclusive to provide clear information to buyers about the total cost payable. This ensures transparency in pricing and allows buyers to make informed decisions.
• Profit Margin Scheme for Used Cars: Dealers often use the Profit Margin Scheme for used cars, where VAT is charged not on the full selling price but on the profit margin of the dealer. This scheme is beneficial for both dealers and buyers, as it generally results in a lower VAT amount being payable compared to calculating VAT on the total sales price.
• Conditions for Profit Margin Scheme: Specific conditions must be met for a dealer to apply the Profit Margin Scheme. The car must have been purchased from a non-taxable person or a taxable person who also used the Profit Margin Scheme. It's crucial for buyers to understand that this scheme may affect the documentation and pricing structure of their purchase.
• Tax Invoices: Dealers must issue a tax invoice for all standard-rated supplies, including used cars sold under the Profit Margin Scheme. For sales under this scheme, the invoice should clearly state that VAT was calculated on the profit margin.
• No VAT Credit for Consumers: If you are buying a car for personal use, you cannot reclaim any VAT paid on the purchase. This contrasts with VAT-registered businesses, which can reclaim VAT as input tax.
• Documentation and Invoices: Ensure you receive a proper tax invoice upon purchasing a car. This is crucial for your records, even though you cannot reclaim VAT. The invoice should clearly mention the VAT amount and confirm whether the Profit Margin Scheme has been applied.

What are the Key VAT Points for Personal Car Buyers?

In order to ensure you understand what you are paying for, there are a few key points to always keep in mind. As a personal car buyer, it is your responsibility to keep track of the documentation and a detailed price breakdown relating to your purchase.

• Always check whether the price includes VAT.
• Understand the implications of the Profit Margin Scheme.
• Keep all VAT-related documentation for your records.

Why Should I Know About VAT?

Understanding VAT elements is necessary because it affects the final amount you pay and ensures transparency in your transactions. On the other hand, knowledge of VAT rules can also protect you from potential overcharges and help you make more informed decisions.

Navigating VAT as a personal car buyer doesn't have to be complicated. Armed with the correct information, you can make purchases that are not only compliant with the law but also the best fit for your budget and needs.

VAT for Car Buyers in the UAE

Purchasing a car involves more than just choosing the suitable model; understanding the Value Added Tax (VAT) implications has become a crucial aspect in the last few years. In the UAE, VAT significantly affects car transactions, and staying informed can help you make cost-effective decisions. Let's look at how VAT comes into play when purchasing, financing, or leasing a car:

Outright Purchases vs. Hire Purchase Agreements

• Outright Purchases: If you have the means to buy a car outright, the VAT is straightforwardly applied at the time of purchase based on the total price of the car.
• Hire Purchase Agreements: For those opting for hire-purchase, VAT is more complex. The total amount payable (including the finance charge) is subject to VAT, which is spread out across the payment schedule.

Essential Tips for Buying a Used Car in the UAE

When buying a second-hand vehicle in the UAE, it is crucial to understand the differences in VAT application depending on who you are buying from:

From a Dealer:

Always ensure you receive a Tax Invoice from the dealer. This invoice proves that VAT has been paid, which is crucial for documentation and future resale.

From the First Owner:

If purchasing from a private car seller (the first owner), ask for the original Tax Invoice they received when they bought the car from the dealership. This invoice is essential to confirm that VAT was paid. Additionally, request a copy of their registration card and Emirates ID to help verify the seller's identity and ownership of the vehicle.

Benefits for Future Resale:

The original tax invoice from the dealership or from the first owner, along with the registration copy and Emirates ID, will be beneficial when you decide to sell the car. It proves that VAT has been paid, making it more attractive to potential buyers and helping you secure a better resale price.

VAT and Trade-ins

When trading in your old car for a new one, VAT applies to the sale of the new car without deducting the trade-in value. This means VAT is calculated on the total price of the new vehicle before any trade-in discount.

VAT on Leased Cars

Leasing a car also attracts VAT at the standard rate of 5%. The same VAT principles apply, whether it's a short-term or long-term lease. Remember that, in this case, any additional charges, such as for tolls or damages, are also subject to VAT.

VAT on Imported Cars

Importing a car outside of the UAE also attracts VAT at 5%. The VAT then applies based on the customs value, which includes cost, insurance, and freight. However, if you're registered for VAT and meet certain conditions, you might defer this payment until your VAT filing.

VAT Implications for Car Transactions in the UAE

Just as with any other transaction, car buying and selling is subject to certain VAT implications. These will differ on the type of transaction and several other factors. 

1. Standard Rate (5%)

New Cars: For a new car bought directly from a dealership, the standard VAT rate of 5% is applied to the total price of the vehicle.

Used Cars from Dealerships: A dealership selling a used car may apply the standard VAT rate to the total sale price unless the Profit Margin Scheme is used.

2. Profit Margin Scheme for Used Cars

Under this scheme, VAT is applied only to the dealership's profit margin, not the total selling price of the car. This can result in lower VAT costs for buyers.

Conditions: The car must have been purchased from a non-taxable person or another taxable person using the Profit Margin Scheme.

3. VAT on Trade-Ins

When trading in an old car for a new one, VAT is applied to the full price of the new vehicle before deducting the trade-in value. The trade-in value itself is not subject to VAT.

4. VAT on Car Imports

For cars imported from outside the UAE, a 5% VAT is applied based on the customs value, which includes the cost, insurance, and freight. This is payable upon importing the car into the country.

5. No VAT for Private Sales

If you purchase a used car from a private individual (not a business), no VAT is charged, as private sellers are not VAT-registered.

6. VAT Documentation

It's essential to obtain a tax invoice when buying from a dealership, as this is proof that VAT has been paid, which can be beneficial for future resale and legal compliance.

VAT Implications for Car Exports

Exporting a car from the UAE involves specific VAT regulations and documentation requirements. Understanding these implications can help ensure compliance and avoid unexpected costs.

1. Zero-Rated VAT for Exports:

The sale is typically zero-rated when a car is exported from the UAE to a country outside its borders. This means no VAT is charged on the transaction at the time of sale, provided certain conditions are met. However, this does not mean you will not be charged a VAT percentage in the country of import.

Conditions for Zero-Rated VAT:

The car must be physically exported out of the UAE within 90 days from the date of supply.

Proof of export must be provided, including an Export Declaration, proof of transport, and confirmation of arrival in the destination country.

2. Required Documentation for Zero-Rated VAT:

Export Declaration:

This document is issued by UAE Customs and confirms that the vehicle has been declared for export. It must be obtained before the vehicle leaves the UAE and should include details such as the vehicle's make, model, VIN, exporter information, and total value.

Proof of Transport:

This varies depending on the mode of transport:

• Sea Transport: Bill of Lading issued by the shipping company.
• Air Transport: Airway Bill issued by the airline.
• Land Transport: The Transport Company agreement and Invoice confirming the vehicle's details and destination. 

Exit Certificate:

Issued and stamped by customs authorities at the point of exit (border checkpoint or port). Confirms that the vehicle has physically left the UAE.

Proof of Arrival for Oman and KSA:

Documentation confirming the vehicle's arrival in Oman or KSA may include an import declaration, Vehicle Clearance Certificate (VCC), or a copy of the Registration Card, applicable only to these neighbouring countries.

3. Consequences of Non-Compliance:

If the vehicle is not exported within 90 days or the necessary documentation is not provided, the sale will not qualify for zero-rated VAT, and a standard 5% VAT will be due on the transaction.

Inaccurate or incomplete documentation can result in fines or penalties from the FTA, and the exporter may be required to pay the VAT amount due.

Conclusion

Understanding the UAE's VAT implications for car transactions and exports is crucial for making informed decisions. Whether buying, trading in, or exporting a vehicle, having the correct documentation and understanding the VAT process will help facilitate a smooth transaction. Always consult a tax advisor or legal professional if unsure about the VAT process or export requirements.

If you're unsure how to proceed with a car purchase or export, seeking professional assistance is recommended. We at First Choice Cars have extensive experience in car selling and buying in the UAE. Our knowledgeable team can help you find the right vehicle to suit your needs and budget while managing all VAT-related and export documentation to ensure a smooth transaction.