The margin scheme: VAT only on the reseller's margin

A second-hand shop in Leipzig buys a used mirrorless camera from a student for 400 € and sells it three weeks later for 638 €. Under the general rules, the sale price would contain 101.87 € of VAT. Under the margin scheme it contains 38 €, because only the margin of 238 € counts. For a dealer working on thin margins, a gap of almost 64 € decides whether the deal is worth doing at all.

The problem section 25a solves

A buyer who purchases from a private individual pays a price with no VAT shown and has nothing to deduct as input tax. On resale, the general rules would tax the full sale price. The tax would then also hit the part of the price that the dealer merely passed on to the original seller.

When the item was first sold to a private consumer, it already carried VAT. If it comes back onto the market through a dealer, taxing the whole price again would add a second layer, and every further round would add another. Commercial second-hand trade would end up worse off than any private flea-market sale.

Section 25a UStG steps in at exactly this point. What is taxed is not the sale price but only the amount by which it exceeds the purchase price, in other words the dealer's margin. That is the value the dealer adds, and only this added value is meant to bear VAT once more at the dealer's stage.

The scheme is not open to everyone who sells something used. It requires three conditions, all met at the same time: a reseller, a purchase on which no VAT was owed or which was itself made under the margin scheme, and an item that is not among the excluded precious stones and precious metals.

Who counts as a reseller

The statute defines the reseller itself. A reseller is anyone who deals commercially in movable tangible goods, and also anyone who sells such goods at public auction in their own name. That covers the used-car dealer, the antiquarian bookshop, the second-hand clothing store, the electronics buy-back shop and the auction house acting on its own account.

The item must be movable and tangible. Land and buildings are therefore excluded from the outset, and so are rights, receivables and purely digital content. Beyond that, the kind of goods hardly matters: furniture, clothing, machinery, vehicles, books and works of art can all fall under the scheme alike.

The wording turns on the activity of dealing. It means a business that buys and sells such goods. Whether a firm that occasionally disposes of its own used fixed assets also counts as a reseller is not stated expressly in the statute. This course assumes the typical dealer; in borderline cases a tax adviser's view is worth having.

A business that is not a reseller pays VAT under the general rules. When it sells a used item, the question is not about a margin but, at most, whether input tax was deducted on the purchase and whether the use of the item has changed since. That is the subject of the second module of this course.

Which purchases carry the margin

The second condition concerns the supply to the reseller. It must have taken place within the Community territory, and either no VAT was owed on it or the previous supplier itself applied the margin scheme. The purchase is therefore decisive: it determines whether the later sale may be taxed on the margin.

• purchase from a private individual who owes no VAT on the sale
• purchase from a small business that owes no tax under section 19 UStG
• purchase from another reseller who applied the margin scheme in turn
• purchase from a private individual in another member state who likewise owes no VAT there

A purchase from a business taxed under the normal rules, with VAT shown on the invoice, does not qualify. There the dealer had the input tax deduction, and the resale follows the general rules. If the dealer buys the same kind of goods partly from private sellers and partly from regular suppliers, each item must be traceable to its purchase.

When a business owes no VAT as a small business is explained in the course on the small business scheme. For this module the consequence is enough: its supply carries no VAT owed, and it therefore opens the margin scheme to the dealer who buys from it.

Paragraph 7 excludes goods the dealer acquired intra-Community where the supply to the dealer was exempt as an intra-Community supply in the other member state. The dealer then pays acquisition VAT in Germany and can deduct it as input tax under section 15(1) no. 3. In that situation there is no hidden tax left to protect.

The third condition is an exclusion. Precious stones and precious metals from the customs tariff headings named in the statute are outside the scheme, even when used and bought privately. The headings concern the stones and metals themselves; whether a piece of jewellery falls under them depends on its tariff classification, not on the value of its material.

The margin as the taxable amount

Under paragraph 3, the supply is measured by the amount by which the sale price exceeds the purchase price of the item. The purchase price is what the dealer actually paid, the sale price what the customer pays. The difference is the margin, and the tax is worked out from it alone.

The most important sentence follows shortly after: VAT is not part of the taxable amount. The margin therefore already contains the tax. Adding 19 percent on top of the margin is wrong; the correct method is to divide the margin by 1.19 and to pay the gap between the margin and the result as tax.

A round case shows the gap. If the margin is 1,190 euros, the taxable amount is 1,000 euros and the tax 190 euros. Anyone who adds 19 percent to the 1,190 euros instead ends up at 226.10 euros and pays 36.10 euros too much, on every single sale and without it standing out in the advance return.

Paragraph 5 sets the rate: the general rate of section 12(1) always applies, and it is 19 percent. This holds even for goods that, outside the margin scheme, would be taxed at the reduced rate of seven percent under section 12(2) and Annex 2. The margin knows only one rate, whatever goods are sold.

A sale below the purchase price produces no margin. The sale price does not exceed the purchase price, the taxable amount is zero, and no tax arises on that sale. There is no refund, however, under the item-by-item method: a loss on one item does not reduce the margin earned on another.

If an item is not sold but withdrawn or given away free of charge, paragraph 3 replaces the sale price with a value under section 10(4) no. 1. In day-to-day trade this is rare; the rule nonetheless ensures that taking a piece home from stock for private use does not escape tax.

For works of art, paragraph 3 contains a flat rate. If their purchase price cannot be established or is insignificant, 30 percent of the sale price is used as the amount on which the supply is measured. The flat rate applies only to works of art within item 53 of Annex 2, not to furniture, books or other used goods.

The global margin for items up to 750 euros

With thousands of small items, item-by-item work is tedious. Paragraph 4 therefore lets all supplies of a tax period be taken together: the total of the sale prices minus the total of the purchase prices of the same period. This global margin is treated as a single margin, and the tax is extracted from it in the same way.

The simplification has a fixed limit. It is allowed only for items whose purchase price does not exceed 750 euros. An item that cost exactly 750 euros may still go into the global margin, one bought for 750.01 euros may not. What counts is the purchase price of the individual item, not its sale price.

The key difference from the item-by-item method lies in losses. In the global margin, every purchase and sale of the period goes into the same total, so an item sold below cost reduces the margin on the others. Because the wording refers to the purchase prices of that period, stock bought but not yet sold also counts.

Choosing the global margin means giving up a freedom. Under paragraph 8, the margin scheme can be waived only in so far as paragraph 4 is not applied. For items in the global margin there is therefore no switch to normal taxation of individual sales, even if a business customer would like an invoice showing VAT.

More expensive items stay in the item-by-item method. A dealer can run both methods side by side: the global margin for small items up to the limit and the individual margin for everything that cost more. The records must then show which method each item belongs to.

The invoice without a separate VAT amount

The invoice first has to carry the general mandatory details; they are covered in the course on the annual VAT return and the EC sales list and are not repeated here. Section 14a(6) UStG adds one item for the margin scheme and takes another one away.

What is added is a notice of the special scheme. Depending on the goods, it reads „Gebrauchtgegenstände/Sonderregelung“, „Kunstgegenstände/Sonderregelung“ or „Sammlungsstücke und Antiquitäten/Sonderregelung“. It is required, not merely recommended, and it tells anyone reading the invoice that the price was taxed under section 25a.

What is taken away is the separate statement of VAT. For section 25a(3) and (4), the rule on showing the tax amount does not apply. The invoice states the total price but neither a net amount nor a tax amount. As a side effect, the pricing stays hidden, since the margin could be worked back from the tax.

For a business buyer this has a direct consequence. The input tax deduction under section 15(1) requires tax legally owed and an invoice, and with no tax amount shown there is nothing to deduct. A tradesman who buys a van under the margin scheme therefore bears the full price.

If the dealer shows a tax amount anyway, section 14c(1) applies. Whoever shows more tax on an invoice than is owed on the supply also owes the excess under that provision. Badly configured till or invoicing software can wipe out the whole benefit of the margin scheme until the invoice is corrected.

Records, waiver and option

Paragraph 6 extends the general record-keeping duties. The reseller's records must show the sale prices, the purchase prices and the taxable amounts under paragraphs 3 and 4. Without these three figures the margin cannot be checked, and it is the margin that carries the entire tax.

If the dealer applies the general rules alongside the margin scheme, the statute requires separate records. That is everyday life for a car dealership selling new cars with VAT shown and used cars bought from private owners side by side. Every sale must be clearly attributable to one of the two areas.

Under paragraph 8, the reseller may waive the margin scheme for any individual supply, as long as paragraph 4 is not applied. The full sale price is then taxed under the general rules and the tax may be shown on the invoice. This can be a concession to a business customer who depends on the input tax deduction.

Paragraph 2 opens the scheme in the other direction. The reseller may declare that it will also apply to works of art, collectors' items or antiques that the reseller imported, and to works of art whose supply to the reseller was taxable and did not come from another reseller.

The declaration must be made at the latest with the first advance return of a calendar year and takes effect from the beginning of that year. It binds for at least two calendar years. For the items brought in this way, paragraph 5 rules out the input tax deduction on the purchase, including import VAT.

If the dealer later waives the margin scheme for one of these items after all, paragraph 8 allows the input tax deduction at the earliest in the advance return period in which the tax on the dealer's sale arises. The input tax thus moves from the purchase to the sale and is not recovered retroactively.

For supplies to other member states, paragraph 7 rules out the exemption for intra-Community supplies. A dealer selling a used vehicle under the margin scheme to an EU buyer abroad pays VAT on the margin in Germany; the buyer, in turn, does not pay acquisition VAT. For new vehicles, the margin scheme does not apply to such a supply.