VAT Profit Margin Scheme: Guide 2026, warranties, and the “selling price” boundary

What the PMS Guide 2026 says, and what it does not explicitly restate

1. In Section 4.1.2, the PMS Guide defines the Selling Price as the consideration received “for the supply of the Good,” and then draws a line between cases:

• “Where the buyer also pays the Reseller for any ancillary supplies which are directly linked to the sale of the Eligible Good (e.g. non-optional accessories fitted in a used car during repairs, which are necessary and incidental to the supply of the used car)” According to the FTA, “such payments should be included in the Selling Price”.
• “Where the Reseller provides additional Goods or Services as a separate supply (e.g. extended warranty services on a used car). Such payment “does not form part of the Selling Price, and would be subject to the normal rules”.

This is “new” in a very practical sense because it is now expressly placed inside the PMS computation section (Selling Price), rather than being left to practitioners to infer from general VAT principles. It is also clearly intended to prevent a common error: sweeping separately supplied warranty income into the PMS Selling Price, thereby (incorrectly) subjecting it to the “margin-only” mechanism.

2. At the same time, the PMS Guide does not provide a parallel, explicit statement of the other side of the warranty story – namely, the scenario where warranty coverage is simply part of the overall car deal (included in the price, with no separate charge). The closest it gets is the generic “ancillary supplies directly linked… necessary and incidental” language (with an accessories example), which is not tailored to warranties.

The Automotive VAT Guide fills the “included vs separate” warranty gap

3. The older Automotive Sector VAT Guide No. VATGAM1 is much more explicit. It first frames the factual split:

• warranty is often provided “at the time of sale” and “the price for the warranty service is included in the price of the car”;[1]
• in other cases it is “supplied separately from the sale of the car” and “n such instances the price for the warranty service is charged separately”.[2]

Then, in Section 7.1.1 it states the consequence of the “included” case: VAT is already accounted for on the original car supply including on the price for the warranty, and “no further VAT implications will arise” when repairs are carried out. Crucially, it adds that “this position will also apply to the sale of used cars where a motor vehicle dealer has accounted for VAT under the Profit Margin Scheme (provided the cost of warranty is included in the price of the used car)”.

4. So, Section 7.1 identifies the “included warranty” scenario by reference to the following features:

• “cost of warranty is included in the price” of the good;
• “the supplier would undertake to repair any defects in the car for a specified period free of charge”;
• “the supplier would not charge any extra fees for the warranty repair services provided during the specified period”;
• “VAT … have already been accounted for on the original supply of the car (including on the price for the warranty)”.

5. In Section 7.2, the Automotive Guide then addresses the “extended warranty” sold “for an extra charge”: it is a taxable supply of services subject to VAT at 5%.

6. One feature remains common even in the “separate” (extended warranty) scenario: the customer pays no further amount at the time of repair or replacement. The differentiating indicators are instead found in the way the arrangement is offered and priced:

• separate warranty is optional rather than mandatory: “A supplier may provide its customers with the option to purchase an extended warranty for a specified period.
• the coverage is expressly described as an “extended” period, which presupposes the existence of a baseline (shorter) warranty period included with the vehicle;
• the extended warranty is supplied for a separate (additional) charge, distinguishing it from the included-warranty model.

So, conceptually, the Automotive Guide gives a two-step taxonomy that the PMS Guide 2026 only partially verbalizes:

a) Included warranty (no separate charge) is to be treated together with the car. PMS still applies to the used-car sale (with warranty cost embedded).

b) Extended warranty for an extra charge is separate taxable service at 5%, i.e. outside the PMS Selling Price.

7. The two guides are not in conflict. Rather, the PMS Guide’s sentence about “extended warranty services… as a separate supply” aligns with the Automotive Guide’s extended warranty treatment. The PMS Guide now just anchors this distinction inside the PMS calculation itself, implicitly warning that “PMS Selling Price” is not a dumping ground for all cash collected in a used-car transaction. Accordingly, the Automotive Guide’s warranty analysis remains relevant as interpretive guidance on how to classify warranty arrangements).

8. However, the new PMS Guide articulates the “extra charge” (“separately priced”) concept in a more substantive way: “Where the Reseller provides additional Goods or Services as a separate supply (e.g. extended warranty services on a used car), such payment does not form part of the Selling Price, and would be subject to the normal rules”.

On this formulation, the FTA is not merely listing factual indicators (such as “included in the price”), but directing the reader to make a classification judgment: is the warranty element an additional service supplied separately from the eligible good, or is it part of the eligible good transaction? Where the warranty is (i) an extension beyond the baseline coverage and (ii) constitutes an additional service supplied as a separate supply, its consideration “does not form part of the Selling Price.”

9. This also leaves room for an argument, potentially significant in practice, that even if an extended warranty is embedded in a single headline price for the eligible goods (without a separately stated amount), it may still fall outside “Selling Price” where, on a proper characterisation of the arrangement, it is in substance a separately supplied warranty service rather than an ancillary element of the eligible goods supply.

[1] Section 7.

[2] Ibid.

Should a longer warranty embedded in a higher car price be treated as separate?

10.  In practice, there are the difficult middle cases. For example:

• a dealer may offer “car with 2-year warranty” and “car with 3-year warranty”;
• the three-year option costs more, but the invoice (contract) does not separately itemize “warranty price”. It is just a higher total price for the car package.

11. Last paragraph of Sec. 4.1.2 of PMS Guide proposes to use “the distinction between a single composite supply and multiple supplies” to “differentiate between the two aforementioned categories” (separate supply vs ancillary one).

12. Article 4 of VAT Executive Regulation requires a person supplying “more than one component for one price” to determine whether the supply is a “single composite supply” or “multiple supplies.” A “single composite supply” exists where there is a principal component plus “a component … which either are necessary or essential to the making of the supply, including incidental elements which normally accompany the supply but are not a significant part of it; or do not constitute an aim in itself, but are instead a means of better enjoying the principal supply”.

Clause 4 then adds an important gatekeeper: a single composite supply “may exist” only if both:

(a) the price of the different components “is not separately identified or charged,” and

(b) all components are supplied by a single supplier.

13. Applying Article 4 to the “2 years vs 3 years” pricing model, will lead to a following conclusions.

First lens: is the extended year an “aim in itself”?

13.1. If the buyer’s decision is genuinely about purchasing additional protection (a longer coverage period) rather than merely receiving something incidental that normally accompanies the car sale, the extended element begins to look like an “aim in itself” rather than a mere “means of better enjoying” the principal supply. This is consistent with the Automotive Guide’s own framing of an “extended warranty” as an optional purchase for an additional period.

Second lens: can the consideration for the warranty element be identified, even if not itemized?

13.2. Formally, Article 4(4)(a) focuses on whether the price of components is “separately identified or charged”. In the scenario at hand, the invoice may show only one total price, but the dealer’s offer structure itself often reveals an identifiable incremental consideration: “AED X with 2 years; AED X+Δ with 3 years.” If Δ is commercially determinable from quotes, emails, advertisements, or pricing tables, it becomes difficult (in substance) to say that the extended warranty was not “separately identified” at all because the pricing differentiation exists precisely to price that additional year.

Besides, Article 4(2) requires the characterization exercise to be carried out by reference not only to invoice mechanics, but to the transaction as a whole: a “single composite supply” is defined as a supply with more than one component, assessed “taking into account the contract and the wider circumstance of the supply”

13.3. This is where the Automotive Guide and the PMS Guide together point toward a practical conclusion:

• When the warranty element is truly included (no optionality; no incremental price; no separate identification in substance), the warranty is part of the car supply and, for a used car under PMS, its cost is embedded in the PMS Selling Price.
• When the customer is paying extra for an extended period (whether the extra is shown as a separate line item or embedded as a higher “package” price), there is a strong argument that the customer is purchasing an additional service, which the Automotive Guide treats as taxable at 5%. Consistently, the PMS Guide says that where extended warranty services are a separate supply, the payment does not form part of PMS Selling Price and is taxed under normal rules.

14. The remaining uncertainty lies precisely in the “middle case”: the dealer offers “2 years” and “3 years”, the latter is more expensive, but the invoice does not itemize a “warranty price” and shows only a single higher package price.

The PMS Guide itself signals that this is a classification question to be approached through the single composite supply / multiple supplies distinction. Article 4, however, does not confine that exercise to invoice form; it requires the characterization to be made “taking into account the contract and the wider circumstance of the supply.”

Comparative approaches to warranties and guarantees

15. A comparative survey below helps to test whether, in VAT systems that face the same packaging techniques, a higher single contractual price is typically treated as merely the price of “better goods”, or as consideration for an additional, separately consumed protection element.

16. When analyzing the VAT treatment of warranties and guarantees, it is useful to begin not with labels such as “composite” or “multiple supply,” but with the underlying legal nature of what is being provided. Across jurisdictions, the majority of tax authorities converge on a fundamental distinction between:

• warranties included in the price of the goods, and
• warranties or service contracts sold separately for an identifiable additional amount.

While the rate or exemption outcome varies (especially in systems where separately sold warranties are treated as insurance as in parts of the EU and UK) the conceptual basis is broadly consistent: an included guarantee is not a separate economic performance, but a feature of the goods themselves.

United Kingdom

17. UK HMRC in its Manual No. VATSC06200 concludes that “a manufacturer’s warranty on a new purchase will last for an initial set period and covers the reliability of the item while it is still new and expected to be mechanically sound. When the manufacturer makes a repair under this warranty there is no supply for VAT purposes, even if new parts are supplied… because the original goods were costed to allow for such repairs and to tax the warranty repair again would result in double taxation”.

The repair by a dealer or third party “on behalf of either a UK or overseas manufacturer … is not covered by the warranty”. Such repair is “a supply by the third party to the manufacturer and the charge is the consideration”.

18. The HMRC does not differentiate between above situations and cases where “some retailers, particularly jewellers and opticians, offer customers an ‘insurance’ that provides for free repair or replacement if the goods are lost or damaged within a set period. The retailer may cover the liability for the repair or replacement by either obtaining insurance cover or including the cost in the overall price”. In VATSC06210, HMRC explains that “in such cases neither a repair free of charge nor the free replacement of goods is a supply since the original charge covered the costs involved.

19. In VATINS3705 the HMRC additionally clarifies that “a ‘warranty’ or ‘guarantee’ may constitute either of the following types of supply:

1. an undertaking, or guarantee, given by the retailer or manufacturer to the customer that if goods should prove to be faulty within a certain time limit then they will bear the cost of providing the appropriate repairs or replacement parts; and
2. a separate warranty, usually provided by someone other than the retailer or manufacturer, which provides cover against the risk of the goods proving to be faulty within a certain period.

Situation (a) covers the basic (usually) twelve month warranty that effectively covers the trader’s responsibilities under the Sale of Goods Act. This may have some or all of the characteristics of insurance (see VATINS2110) but will not be insurance if the warranty is a consequence of the contract of sale, under which the substance of the provider’s obligation is the sale of goods that meet the required standard.

Situation (b) typically covers supplies of ‘extended warranties’ and similar services. The liability of a charge for this type of warranty is considered in VATINS3720”.

20. For UAE purposes, HMRC’s “no supply” rationale supports a narrow proposition relevant to the present middle case: where the dealer’s promise is framed as an included quality guarantee and the customer pays no separately bargained amount for that promise, the subsequent repair or replacement is not naturally analysed as a separate consumption event. The UAE, however, operationalizes the boundary through Article 4’s requirement to consider the contract and the wider circumstances of the supply and, critically, whether the price of the components is “separately identified or charged”; in a tiered offer (“2 years” vs “3 years”), the question becomes whether the incremental Δ is identifiable in substance even if not line-itemed.

Bahrain

21. Bahraini NBR in its Public Clarification No. VAT/PC/20/1 of 10 March 2020 explains that “repair services provided by the dealer to the customer during the warranty period” should not be included in scope of VAT “as the dealer has a contractual obligation to rectify any defaults identified during the warranty period... Therefore, the dealer should not charge VAT to the customer on the warranty repair”.

The NBR continues to deal with the reimbursement of repairs costs paid to the dealer from the manufacturer during the warranty period: “… warranty repair services are not separate supplies for VAT purposes where VAT has previously been paid on the warranty issued when the goods were sold. This applies where the cost of the warranty forms an integral component cost element of the sales price of the goods: a. From the manufacturer to the dealer, and thereafter b. From the dealer to the customer”.

But “any subsequent warranty repair services in respect of such goods will constitute a separate supply for VAT purposes on which VAT at the standard rate must be charged” if “the cost of a warranty is not included in the sales price of goods”.

22. In scenarios where a customer purchases “an extended warranty for consideration when the goods are initially supplied, or at a later date (e.g. when the initial warranty period is about to expire)”, the treatment changes: “Typically, the dealer acquires the extended warranty from the manufacturer and supplies it to the customer. The provision of the additional warranty is a separate supply for VAT purposes…”.

23. Bahrain’s distinction reinforces the UAE’s: embedded warranty cost is treated as part of the original bargain, whereas an extended warranty offered as an additional product is treated separately. That is closely aligned with the UAE’s own two-guide taxonomy but it also illustrates why invoice form is not determinative: the practical trigger is whether the extended coverage is commercially separable as an optional enhancement. In UAE terms, the same inquiry is captured by Article 4(2) (contract and wider circumstances) and Article 4(4)(a) (whether the incremental consideration is “separately identified”), which is precisely the risk in “AED X / AED X+Δ” package pricing.

Ireland

24. Irish Revenue addresses VAT Treatment of Extended Warranties in its Tax and Duty Manual (December 2025). Para 4.3 provides that “typically, a manufacturer’s guarantee or warranty that is included in the supply of goods attracts the rate of VAT applicable to the goods sold to the consumer. Similarly to the FTA , the Revenue refers to the here Mixed supplies of goods and services

In contrast, “the supply of an extended warranty is a VAT exempt supply of an insurance service, in circumstances where it meets the definition of insurance, i.e., where the provider undertakes, in return for payment, to provide the consumer, in the event of materialization of the risk covered, with the repair/replacement service agreed when the insurance service plan (extended warranty) was signed”.

25. This experience is directly instructive for the UAE only at the level of method, not outcome: it shows that the same extended-warranty economic function can move into a different VAT category where it resembles insurance, whereas an included manufacturer warranty follows the goods. For the UAE middle case, the comparable question is whether the longer warranty is merely part of the description of the goods sold (consistent with the Automotive Guide’s “included” scenario) or whether, taking the contract and wider circumstances together, the longer term is being priced as an additional service supplied separately—in which case the PMS Guide would exclude it from “Selling Price” and tax it under normal rules.

Oman

26. Oman’s Financial Services Sector VAT Taxpayer Guide draws a helpful boundary:

• “Generally, all non-life insurance services provided in Oman are standard-rated. This includes general insurance, health insurance and any corresponding reinsurance, insurance brokerage services and other insurance-related services”.
• But “note that warranties are not normally considered as insurance services for VAT purposes”.

27. Oman’s reminder that warranties are not normally treated as insurance is not decisive, but it is consistent with treating embedded warranties primarily as a quality (conformity) feature of the goods rather than as a distinct financial product. For the UAE middle case, this supports resisting an automatic conclusion that “longer warranty = separate service”; instead, the classification must be grounded in Article 4’s wider-circumstances test and the separateness of the incremental Δ, because only then would the warranty fall within the PMS Guide’s “separate supply → outside Selling Price”.

United States (sales tax)

28. US treatment is not VAT. It’s state-level sales/use taxes, and rules vary significantly. A very “teachable” pattern is that:

• Mandatory warranty included in the product price is taxable with the product in many states.
• Optional extended warranty for an extra charge is often treated separately.

29. For example, California Department of Tax and Fee Administration (CDTFA) in Publication No. 119, explains that “a mandatory warranty or maintenance agreement is a contract that comes with a product and is included in the total selling price. Under a mandatory warranty, your customer does not have the option to purchase the product without the warranty. Examples include standard manufacturers' warranties that come with new vehicles, computers, electronic devices, appliances, and auto repair shops' parts-and-labor warranties on repairs”.

30. If a taxpayer supplies a raxable product, “the mandatory warranty is also taxable. The warranty is usually included in the price of the item sold, but you may show it as a separate charge on your invoice. If you do, that separate charge is taxable (provided the sale of the associated item is taxable).

Example: Your electronics store sells a new computer to a consumer for $1,500. The price includes a one-year parts-and-labor warranty backed by the manufacturer. Your full $1,500 charge is taxable”.

In contrast, “an optional warranty or maintenance agreement is a contract your customer may choose to purchase for an additional charge. If your customer can buy the product without buying the warranty from you, the warranty is optional. Separate charges for optional warranties are generally not taxable …. Examples of optional warranties include an extended repair warranty for a computer or electronic device, an extended mileage warranty for a car, and a service plan for a refrigerator.

Example: Your car dealership sells a used car for $10,500. You offer the customer the option to buy an extended, 18-month warranty for an additional $500. The customer can buy the car without the warranty. If the customer buys the car and the optional warranty, tax would apply to the $10,500 charge for the car but not to the $500 charge for the warranty”.

31. Michigan’s Treasury Technical Advice Letter of October 27, 2022 similarly distinguishes between mandatory and optional warranties:[1]

• “only mandatory manufacturer warranties sold as part of an original purchase of equipment are subject to sales tax, and in that case, the cost of the mandatory warranty is considered to be part of the overall equipment purchase price”.
• “Any time that a warranty is separately stated on the invoice and is optional or is otherwise separated from the original purchase of equipment – for example, when an optional or extended warranty is purchased at the same time new equipment is purchased, an optional or extended warranty is purchased after the sale of equipment, an optional or extended warranty is purchased in connection with used equipment, or an optional or extended warranty is purchased on a stand-alone basis, wholly separate from the purchase of any equipment – the warranty sale will not be subject to Michigan sales tax. The sale of an optional or extended warranty is, in essence, a sale of nontaxable services”.

32. A useful point of comparison from the United States is not the tax outcome (US sales tax is structurally different from VAT and is state-specific), but the classification instinct. Many state rules distinguish between warranties that are mandatory as part of the product offering and warranties that are optional and separately bargained.

• Where the warranty coverage is mandatory so that a customer cannot obtain the goods without it, the tax base typically follows the goods;
• Where the warranty is optional and acquired as an add-on, it is commonly analyzed separately.

This mirrors the same factual marker the FTA emphasizes in the UAE Automotive Guide when it describes the extended warranty model as an “option to purchase” for a separate charge, rather than an inherent feature of the vehicle sale.

33. The U.S. distinction also helps to frame the UAE “middle case” in the correct way. Article 4 requires the characterization exercise to be carried out by reference to the contract and the wider circumstances of the supply, not merely the invoice layout.

34. Thus, even if the invoice shows a single headline price, a tiered offer (“AED X with two years; AED X+Δ with three years”) may indicate that the customer is, in substance, electing an optional enhancement for identifiable incremental consideration. Where Δ is commercially determinable from the surrounding documentation, the warranty extension becomes materially more vulnerable to classification as a separate supply—consistent with the PMS Guide’s rule that payments for extended warranty services supplied as a separate supply do not form part of PMS “Selling Price”.

India GST

35. India’s CBIC Circular No. 216/10/2024-GST of 26 June 2024 clarifies that “where agreement for extended warranty is made at the time of original supply of goods, and the supplier of extended warranty is different from the supplier of goods, the extended warranty should be treated as a separate and independent transaction from the supply of good”. For example, “there may be cases where the supplier of the goods may be the dealer while the supplier of extended warranty may be the OEM or third party. In such cases, the supplies being made by different suppliers cannot be treated as part of the composite supply… In such cases, supply of extended warranty will be treated as a separate supply from the original supply of goods” (para 5.1.1).

The Board also explains that “supply of extended warranty is an assurance to the customers by the manufacturer/ third party that the goods will operate free of defects during the extended warranty coverage period, and in case of any defect attributable to faulty material or workmanship at the time of manufacture, the same will be repaired/ replaced by the said manufacturer/ third party. Further, whether the goods will later on require replacement of parts or just repair service or neither during the said extended warranty period, is also not known at the time of sale/ supply of extended warranty. Thus, extended warranty is in the nature of conveying of an “assurance” and not an actual replacement of part or repairs. Accordingly, … in cases, where supply of extended warranty is made subsequent to the original supply of goods, or where supply of extended warranty is to be treated as a separate supply from the original supply of goods in cases referred in Para 5.1.1 above, the supply of extended warranty shall be treated as a supply of services distinct from the original supply of goods…”.

So, in India timing and identity of supplier drive the classification, and “at time of sale by same supplier” strongly supports single composite value treatment.

36. India’s approach is particularly helpful for the UAE middle case because it makes explicit that timing, supplier identity, and contractual structure drive whether an extended warranty is integrated with the goods supply or treated separately. The UAE reaches a similar destination through different wording: Article 4(2) requires assessment in light of the contract and wider circumstances, while Article 4(4)(a) tests whether component pricing is separately identified; thus, a “2-year vs 3-year” pricing ladder can effectively recreate a separately identified consideration even where the invoice shows one total.

[1] https://www.michigan.gov/treasury/-/media/Project/Websites/treasury/Letters/Technical-Advice/Sales-Tax-Treatment-of-Warranties.pdf

A balanced position

37. Against that background, the UAE question can be stated in its proper form: not whether the invoice shows one number, but whether (in the contract and wider circumstances) the extended coverage is being priced as an additional element for which the customer pays identifiable consideration.

38. Article 4(4)(a) makes that inquiry substantive by requiring that, for a single composite supply treatment, “the price of the different components of the supply is not separately identified or charged”

39. A dealer can therefore fail the “single price” condition even while presenting a single figure on the invoice, if the offer architecture itself makes the incremental consideration commercially determinable (“AED X with 2 years; AED X+Δ with 3 years”), because Δ is then “separately identified” in substance through quotes, pricing tables, emails, advertisements, or other surrounding documentation – precisely the “wider circumstances” Article 4 instructs the interpreter to consider.

40. On that reading, a higher package price does not automatically prove that there is no separate supply of warranty. It merely shifts the focus to whether the additional year is an “aim in itself” and whether the incremental consideration for it can be identified, even if not line-itemed.

41. The consequence then follows coherently across both Guides: where the warranty extension is properly characterized as a separate supply, the PMS Guide treats the related payment as outside the PMS “Selling Price,” and the Automotive Guide’s taxonomy supports treating an extended warranty sold for an extra charge as a distinct, taxable service.

42. A conservative (and, in audits, often defensible) approach is to treat the “extra year” as a separate supply of services whenever the customer is offered a meaningful choice between coverage periods and the incremental price is commercially determinable (even if the invoice shows a single bundled number). This respects the policy underpinning of Article 4: preventing artificial bundling that obscures distinct VAT treatments, and it aligns with the Automotive Guide’s characterization of extended warranty as a taxable service.

43. At the same time, a taxpayer may argue for a single composite supply where (i) the transaction is genuinely presented and agreed as one inseparable “car package,” and (ii) there is no separate identification of the warranty (guarantee) element in any contractual or commercial documentation. That argument relies, first, on Article 4(3)(b), which recognizes a single composite supply where the components are “so closely linked that it would be impossible or unnatural to split” them, and, second, on the unified pricing condition in Article 4(4)(a), which requires that “the price of the different components of the supply is not separately identified or charged”.

Importantly, this line of reasoning is often equally workable where the “warranty” is better characterized as an included guarantee of quality (a conformity promise) rather than as an independently marketed add-on service. In that case, the guarantee is not an “aim in itself,” but merely a means of better enjoying the principal supply of the car, within the meaning of Article 4(3)(a)(2). Splitting such a guarantee from the vehicle would therefore be artificial and inconsistent with the composite-supply logic that treats ancillary elements as following the principal component.

However, the moment the deal architecture creates a transparent differential linked to warranty duration (for example, “AED X with two years; AED X+Δ with three years”), the “multiple supplies” analysis becomes materially stronger because Δ is capable of being separately identified in substance through the contract and surrounding commercial documentation – precisely the “wider circumstance of the supply” Article 4(2) requires to be taken into account.

Disclaimer

Pursuant to the MoF’s press-release issued on 19 May 2023 “a number of posts circulating on social media and other platforms that are issued by private parties, contain inaccurate and unreliable interpretations and analyses of Corporate Tax”.

The Ministry issued a reminder that official sources of information on Federal Taxes in the UAE are the MoF and FTA only. Therefore, analyses that are not based on official publications by the MoF and FTA, or have not been commissioned by them, are unreliable and may contain misleading interpretations of the law. See the full press release here.

You should factor this in when dealing with this article as well. It is not commissioned by the MoF or FTA. The interpretation, conclusions, proposals, surmises, guesswork, etc., it comprises have the status of the author’s opinion only. Furthermore, it is not legal or tax advice. Like any human job, it may contain inaccuracies and mistakes that I have tried my best to avoid. If you find any inaccuracies or errors, please let me know so that I can make corrections.