Tax and Import
The VAT Margin Scheme, and Why Two Identical Cars Cost Different Amounts
Under Articles 312 to 325 a dealer may tax only the profit margin. The screen price looks the same, and for a VAT registered buyer the two cars are not.
Two identical used cars, same specification, same mileage, same screen price. One is sold under the VAT margin scheme and the other on a full VAT invoice, and for a VAT registered buyer they are not the same purchase at all. The mechanism sits in Articles 312 to 325 of Council Directive 2006/112/EC, and the invoice has to state which applies.
How the scheme works
Under the margin scheme a taxable dealer charges VAT on the profit margin rather than on the full sale price of a second hand car. The consequence for the buyer is the part that matters: VAT on a margin scheme car cannot be deducted as input tax, because it is not shown as a separately charged amount on the invoice.
On a full VAT invoice, the opposite is true. VAT is charged on the whole price and a VAT registered buyer entitled to deduct can recover it.
What that does to the same screen price
Take two cars at 120,000 on the windscreen, in a country with a 20 per cent standard rate, and a buyer entitled to full deduction.
| Line | Margin scheme | Full VAT invoice |
|---|---|---|
| Screen price | 120,000 | 120,000 |
| VAT shown separately | none | 20,000 |
| Net of VAT | 120,000 | 100,000 |
| Recoverable by a deducting buyer | 0 | 20,000 |
| Effective cost to that buyer | 120,000 | 100,000 |
The difference is 20,000, or 16.7 per cent of the advertised figure, on cars that are otherwise indistinguishable. For a private buyer with no right of deduction, the two are genuinely equivalent and the distinction is invisible. That is why the same car can be correctly described as good value and poor value depending on who is asking.
Where it bites hardest
- Buying through a company. The recovery position is the whole comparison, and a margin scheme car quietly costs a deducting buyer the VAT it never shows.
- Cross border purchases. The scheme interacts with the rules for moving a car between member states, and a car bought under one treatment does not automatically qualify for the other later.
- Resale. A car bought on a full VAT invoice by a business and sold on may need VAT accounted for on the sale, which is a different position from a car that stayed inside the margin scheme.
- Comparing advertisements. Two listings at the same price are not comparable until the treatment is known, and it is the single question that changes the number most.
The rate makes the gap bigger or smaller
The size of the effect follows the standard rate in the country of purchase, and those vary widely across the Union. On the same 120,000 screen price, for a buyer entitled to full deduction:
| Standard rate | VAT inside a 120,000 price | Effective cost on a full invoice | Gap against the margin scheme |
|---|---|---|---|
| 17 % | 17,436 | 102,564 | 17,436 |
| 19 % | 19,160 | 100,840 | 19,160 |
| 20 % | 20,000 | 100,000 | 20,000 |
| 21 % | 20,826 | 99,174 | 20,826 |
| 27 % | 25,512 | 94,488 | 25,512 |
Between the lowest and highest of those rates the gap moves by 8,076 on the same car at the same advertised price. For a buyer with no right of deduction, every row costs 120,000.
The check that takes one question
The invoice has to state which scheme applies. That is not a courtesy, it is a requirement of the system, and a dealer who cannot answer the question before a sale is not a dealer to buy a car of this value from.
Two further points are worth establishing at the same time, because they follow the car rather than the sale:
- Whether VAT has ever been recovered on the car, which affects what happens on a later sale.
- Whether the car was imported, since import VAT is charged by the destination member state on the customs value plus duty, at a standard rate the VAT Directive floors at 15 per cent. That is a separate charge from anything the margin scheme covers.
Questions readers ask
How does VAT work when buying a used car?
Two treatments exist. Under the margin scheme, set out in Articles 312 to 325 of Council Directive 2006/112/EC, a dealer taxes only the profit margin and the buyer cannot deduct input VAT. On a full VAT invoice, VAT is charged on the whole price and a deducting buyer can recover it.
Does it change the price I pay?
Not the screen price. On a 120,000 car at a 20 per cent rate, a deducting buyer effectively pays 100,000 on a full VAT invoice and 120,000 under the margin scheme, a difference of 20,000 or 16.7 per cent of the advertised figure.
Does it matter for a private buyer?
No. Without a right of deduction the two treatments produce the same cost, which is why the distinction is invisible to most buyers and decisive for some.
How do I know which applies?
The invoice has to say. It is a requirement of the scheme rather than an optional disclosure, so the question can be asked and answered before any money moves.
Is import VAT the same thing?
No, it is separate. Import VAT is charged by the destination member state on the customs value plus any duty, at the standard rate, which the VAT Directive floors at 15 per cent with no ceiling.
Can a margin scheme car be moved onto a full VAT invoice later?
Not by choice. The treatment follows the history of the car and the status of the seller, which is why the position should be established at purchase rather than assumed at resale.
Sources
- Council Directive 2006/112/EC, for the margin scheme for second hand goods at Articles 312 to 325 and the standard rate floor of 15 per cent.
- European Commission, VAT rates, for the standard rates applied by member states that determine what import VAT costs on a given car.