As a business owner, buying and reselling durable goods is a common business model. In certain scenarios, resellers can use the margin scheme for tax benefits.
In this article, you'll learn about the margin scheme and its applicable requirements.
Deciphering Differential Taxation: What Does It Stand For?
Differential taxation implies that for certain goods, resellers are liable to pay a reduced sales tax. The tax is applied only to the difference between the cost price and the selling price, making it a unique taxation structure for specific goods. The protocol for differential taxation is stipulated in Section 25a of the German Value Added Tax Act (UStG).
As per the legislation, differential taxation is applicable for second-hand items like antiques, collectibles, or art pieces. The same holds for other used tangible items.
The primary intent behind differential taxation is to evade double payment of full value-added tax (VAT) on the same item. The total VAT is usually paid at the time of the initial purchase. Hence, with differential taxation, sales tax applies only to the margin between the purchase and resale price.
Eligibility Criteria for Differential Taxation
Before resorting to this form of taxation, sellers need to meet specific conditions:
The items must have been bought within the European Union, also known as the Community territory.
As the buyer, you must not have paid sales tax while purchasing the product.
You should act as a commercial reseller or publicly auction the bought items.
Illustrating Differential Taxation With an Example
Suppose you meet the above requirements, you can then utilize the margin scheme. The following example will demonstrate its practical application:
Assume you procure a used car from a private seller in a different EU country for 10,000 euros. As the seller is a private entity, you are not liable to pay input tax for this purchase. After a few weeks, you manage to sell the car in Germany for 15,000 euros. This is where differential taxation comes into play. According to Section 25a UStG, your VAT obligation is only on the difference between the buying and selling price, i.e., 15,000 euros – 10,000 euros = 5,000 euros.
Therefore, you are taxed only on 5,000 euros instead of the entire amount. The resultant sales tax amounts to 950 euros.
For reference: If the entire sum had been subjected to tax, you would have had to pay a sales tax of 2,850 euros.
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