A taxpayer acting in good faith may apply the margin scheme for VAT purposes, even if it transpires (after the event) that this was done incorrectly.
The case
The issue at the heart of the Court of Justice a case heard concerning the Lithuanian Litdana. This entrepreneur buys cars from the Danish company Handicare car. The invoices contain the following two entries:
- a reference to the Danish provisions on the margin scheme;
- the statement that the cars sold are exempt from VAT.
During an audit, the Lithuanian tax authorities establish that the substantive conditions for the margin scheme have not been met. Consequently, application of the margin scheme is, of course, refused. As a result, Litdana is not required to pay VAT on the margin realised on the cars, but on the total selling price.
In good faith
The Court rules that, provided Litdana is acting in good faith, it may apply the margin scheme. The referring (Lithuanian) court must determine whether Litdana has done everything that could reasonably be expected of it to prevent itself from being complicit in tax fraud.
The Court notes that the fact that the invoice contains two (ambiguous) comments does not necessarily give Litdana cause to suspect fraud. The comments could also be interpreted as indicating the application of the margin scheme.
The wise lesson
In our view, the Court is, quite rightly, accommodating the trader in this regard. This is, however, subject to the condition that the trader acts in good faith. It is clear that this rule does not apply solely to the application of the margin scheme.
Business owners would therefore be well advised to continually assess critically which VAT regime applies to transactions. In case of doubt or uncertainty, it is advisable to ask a supplier explicitly which VAT regime applies. And to ask the supplier to provide further justification for this. Adopting a sufficiently critical approach can be of great benefit to the business owner in a discussion with the tax authorities and/or in proceedings before the tax court.
Material conditions
In the case described above, it transpires in retrospect that the substantive conditions for the application of a scheme were not met. In cases where the substantive conditions are met but the formal conditions are not fully met, the Court of Justice has already ruled on a number of occasions that minor formal defects should not prevent the application of schemes for which the substantive conditions have been met.