A car dealer buys hundreds of used cars from two suppliers. Those suppliers invoice the cars as margin cars. The car dealer therefore applies the margin scheme and only pays VAT on its profit margin. The inspector argues that the cars are not margin cars at all and imposes an additional tax assessment of €3.5 million.
How does the margin scheme work?
The margin scheme is a special VAT scheme for traders in used goods. Normally, a trader charges VAT on the full selling price. Under the margin scheme, he only charges VAT on his profit margin: the difference between purchase and sales price. That makes a big difference. However, this scheme may only be applied if the car comes from someone who cannot deduct VAT himself. Think of a private individual or an exempt entrepreneur. If the car comes from a VAT entrepreneur, who is entitled to deduct VAT, the margin scheme does not apply. In that case, VAT must be calculated on the full sales price.
Transforming to margin car
In the car industry, cars are sometimes wrongly billed as margin cars, when in fact they are not. This is called transforming in the industry. A German leasing company sells a car with VAT to a middleman. That broker then re-invoices the car as a margin car, without VAT. The buyer applies the margin scheme and only pays VAT on its profit margin. The VAT on the purchase price thus disappears from view. The car dealer in this case bought hundreds of cars from two suppliers between 2020 and 2023. Those suppliers invoiced almost all the cars as margin cars.
Two situations, two outcomes
For 134 cars, the car dealer had the German registration papers and took care of the bpm declaration himself. In the case of 227 other cars, he did not have those papers. The court ruled that this distinction was decisive. With the first group, the car dealer could see on the German papers that the cars were previously owned by German legal entities. This should have alerted him. Legal entities are often VAT operators entitled to deductions. Combined with his years of experience in the industry, he should have investigated further. He failed to do so. The after-tax for these 134 cars remains in place.
Without papers, no obligation to investigate
For the other 227 cars, the court ruled differently. For these cars, the car dealer only had the invoices from his supplier. He did not have the German papers. The court found the other circumstances insufficient to assume a duty of investigation for all these cars. The car dealer was entitled to rely on his suppliers' invoices. He is indemnified from subsequent taxation for these cars.