The VAT margin scheme on used parts: when it applies and what the invoice must say

A dismantler sells goods that were bought from people who charged no VAT — a private owner scrapping a car cannot. Charging VAT on the full resale price would tax the whole value again, so the VAT Directive provides a special scheme that taxes only the dealer's margin.

It is harmonised across the EU by Directive 2006/112/EC, Title XII, Chapter 4, so the mechanics below hold in every member state. Only the rate and the national reference differ.

The scheme is decided by the supplier, not the part

This is the point that causes most of the trouble. Whether a part qualifies has nothing to do with its condition or its price. It depends on who you bought it from.

Article 314 makes the margin scheme available where the goods were supplied to you within the EU by one of:

• a non-taxable person — a private individual, the ordinary case for a scrapped car;
• a taxable person whose supply was exempt;
• a small enterprise, where the goods were capital goods;
• another taxable dealer, where that dealer's supply was itself under the margin scheme.

Buy a part from a VAT-registered wholesaler on a normal VAT invoice and none of those apply: that part is sold under normal VAT rules, and you deduct the input tax as usual. Two identical alternators can carry different VAT treatment because they arrived by different routes. The treatment therefore has to be recorded at intake, when you still know where the vehicle came from.

Computing the margin

Article 315 defines the taxable amount as the profit margin, less the amount of VAT relating to that margin. The margin itself is the difference between the selling price and the purchase price as defined in article 312 — the selling price including taxes and incidental expenses charged to the customer.

Note the second half of article 315: the margin is VAT-inclusive, so the tax is extracted from it rather than added to it. Treating the raw difference as the taxable amount overstates the VAT due.

Neither side deducts

Two prohibitions travel with the scheme:

• Article 322 — you may not deduct input VAT on goods used for your margin-scheme supplies.
• Article 323 — your customer may not deduct VAT on a margin-scheme purchase.

That second one matters commercially: a VAT-registered trade buyer recovers nothing on a margin-scheme part. It is not a reason to avoid the scheme, but it is a reason your invoice must be unambiguous.

What the invoice must say

Article 226(14) does not ask for a general reference. It prescribes the mention:

"Margin scheme — Second-hand goods"

An invoice under the scheme also shows no separate VAT line, because the VAT within the margin is not a tax the customer may reclaim. An invoice that both bears the margin-scheme mention and itemises VAT is contradictory, and it is the kind of contradiction an inspector reads first.

Where the scheme is not available

The Court of Justice addressed a case where a dealer bought vehicles VAT-exempt from a taxable person who had held only a partial right of deduction. In C-160/11 Bawaria Motors, the margin scheme was held not to apply. The lesson generalises: an exempt purchase is not automatically an eligible one, and the supplier's own deduction position is part of the test.

Practical consequences for a yard

• Record the acquisition route of every donor vehicle at intake. Reconstructing it at invoicing time is guesswork.
• Keep margin-scheme stock distinguishable from normally-taxed stock, because the invoice differs.
• Do not mix both treatments on one invoice line.
• Check your own national reference — the Directive is the floor, and member states word the invoice mention in their own language.

How ELVPro handles this

Margin-scheme eligibility is captured on the donor vehicle at intake, where the acquisition route is still known, and travels to every part taken off it. The treatment is resolved per line and frozen onto the order, so the invoice carries the right mention and no VAT line — and the part still traces back to the vehicle it came from.