Flashback on ECJ Cases – C-160/11 (Bawaria Motors) – Margin scheme not applicable if supplier can deduct part of input tax

On July 19, 2012, the ECj issued its decision in the case C-160/11 (Bawaria Motors).

Context: Directive 2006/112/EC — VAT — Article 136 — Exemptions — Articles 313 to 315 — Special margin scheme — Supply of second-hand vehicles by a taxable dealer — Vehicles previously supplied exempt from VAT to a taxable dealer by another taxable person which had a right of partial deduction of input tax

Article in the EU VAT Directive

Article 136, 311(1)(1), 313(1), 314, 315 in the EU VAT Directive

Article 136 (Exemptions for other activities)

Member States shall exempt the following transactions:

(a) the supply of goods used solely for an activity exempted under Articles 132, 135, 371, 375, 376 and 377, Article 378(2), Article 379(2) and Articles 380 to 390c, if those goods have not given rise to deductibility;

(b) the supply of goods on the acquisition or application of which VAT was not deductible, pursuant to Article 176.

Article 311 (Margin scheme)

1. For the purposes of this Chapter, and without prejudice to other Community provisions, the following definitions shall apply:

(1) “second-hand goods” means movable tangible property that is suitable for further use as it is or after repair, other than works of art, collectors’ items or antiques and other than precious metals or precious stones as defined by the Member States;

Article 313

1. In respect of the supply of second-hand goods, works of art, collectors’ items or antiques carried out by taxable dealers, Member States shall apply a special scheme for taxing the profit margin

Article 314

The margin scheme shall apply to the supply by a taxable dealer of second-hand goods, works of art, collectors’ items or antiques where those goods have been supplied to him within the Community by one of the following persons:

(a) a non-taxable person;

(b) another taxable person, in so far as the supply of goods by that other taxable person is exempt pursuant to Article 136;

(c) another taxable person, in so far as the supply of goods by that other taxable person is covered by the exemption for small enterprises provided for in Articles 282 to 292 and involves capital goods;

(d) another taxable dealer, in so far as VAT has been applied to the supply of goods by that other taxable dealer in accordance with this margin scheme.

Article 315

The taxable amount in respect of the supply of goods as referred to in Article 314 shall be the profit margin made by the taxable dealer, less the amount of VAT relating to the profit margin. The profit margin of the taxable dealer shall be equal to the difference between the selling price charged by the taxable dealer for the goods and the purchase price.

Facts

Bawaria Motors is a taxable person for VAT purposes, within the meaning of Article 15 of the Law on VAT. It carries out an economic activity consisting in the operation of car showrooms, in the course of which it acquires and then subsequently sells passenger vehicles, both new and second-hand. As part of its activities, it purchases second-hand vehicles from economic operators which, not having been able to deduct the VAT paid on the purchase of those vehicles, issue Bawaria, at the time of the supply, with invoices marked ‘exempt’, so far as concerns the rate of VAT applicable, and referring to Article 43(1)(2) of the Law on VAT. On the resale of those second-hand vehicles, Bawaria makes use of the margin scheme set out in Article 120 of the Law on VAT.
Situations also arise in which Bawaria Motors purchases second-hand vehicles from economic operators who, on acquisition, have deducted VAT within the limits set in Article 86(3) of the Law on VAT. In such situations, the operator issues Bawaria Motors with an invoice marked ‘exempt’, so far as concerns the rate of VAT payable on the supply, and referring to Paragraph 13(1)(5) of the Decree on VAT.
Taking the view that it was entitled, in the cases referred to in the preceding paragraph of this judgment, to apply the margin scheme provided for in Article 120 of the Law on VAT, on 9 February 2009 Bawaria Motors sent the Minister Finansów a request for an individual interpretation.
The Minister Finansów responded to that request on 20 February 2009. He took the view that, having regard to the wording of Article 120(10) of the Law on VAT, Bawaria Motor’s position was not justified. He submitted that Paragraph 13 of the Decree on VAT does not constitute an extension of the situations covered by Article 43 of the Law on VAT, to which Article 120(10) refers. In his opinion that law otherwise complies with Articles 312 to 325 of Directive 2006/112, which allow the application of the margin scheme only in cases where the taxable dealer has acquired the second-hand good from an economic operator which did not have the right to deduct input VAT and therefore incorporated it in the supply price charged to that taxable dealer.
Bawaria Motors brought an action against that interpretation before the Wojewódzki Sąd Administracyjny w Warszawie (Regional Administrative Court, Warsaw), claiming that the Minister Finansów’s position was derived from a literal interpretation of Article 120 of the VAT Law, incompatible with the fundamental principles of VAT, that is to say fiscal neutrality, the effective taxation of only one particular marketing stage and the principle of maintaining competitive conditions.
By a judgment of 10 November 2009, the Wojewódzki Sąd Administracyjny w Warsawie annulled the contested interpretation. It held that Paragraph 13(1)(5) of the Decree on VAT, which introduces a tax exemption not provided for under EU law, does not exempt the economic operator which supplies a second-hand vehicle to a taxable dealer from the obligation to tax that supply where, on acquisition of that vehicle, that economic operator was not entitled to deduct the input VAT in full. According to that court, the exemption set out in that provision of the Decree on VAT concerns only the part of the VAT remaining payable by the economic operator, having regard to the limits provided for in Article 86(3) of the Law on VAT, excluding the amount, corresponding to 60% of the tax indicated on the invoice or to PLN 6 000, as the case may be, which that economic operator deducted on the purchase of the vehicle. It follows, according to that court, that Bawaria Motors is entitled to apply the margin scheme, but only in respect of an amount limited to the input tax which the economic operator which supplied it with the vehicle was unable to deduct, corresponding to 40% of the amount of the tax indicated on the invoice or to the part of that tax in excess of PLN 6 000, as the case may be.
Bawaria Motors lodged an appeal in cassation against that judgment before the Naczelny Sąd Administracyjny, submitting, essentially, that the fact that it was impossible for it to apply the margin scheme in full to the resale of second-hand goods acquired in the context of an exempt supply under Paragraph 13(1)(5) of the Decree on VAT infringed, inter alia, Article 120(4) and (10) of the Law on VAT and the abovementioned provision of the Decree on VAT.
The Minister Finansów also lodged an appeal in cassation, in which he maintained his original position that, in the circumstances of the present case, the taxable dealer is not eligible to apply, even in part, the margin scheme.

Questions

Are the provisions of Articles 313(1) and 314 of [Directive 2006/112], read in conjunction with Articles 136 and 315 thereof, to be interpreted as permitting the application of the special “margin” scheme for taxable dealers in relation to supplies of second-hand goods also where they resell the purchased passenger vehicles and other motor vehicles to which the tax exemption for the supply of passenger vehicles and other vehicles by taxable persons who only have a partial right to deduct input tax on the purchase thereof, as laid down in Article 86(3) of the [Law on VAT], was applied pursuant to the Polish national provisions laid down in Paragraph 13(1)(5) of the [Decree on VAT], where those passenger vehicles and motor vehicles were second-hand goods within the meaning of Article 43(2) of the Law on VAT and Article 311(1)(1) of [Directive 2006/112]?

AG Opinion

Articles 313(1) and 314 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Articles 136 and 315 of that directive, must be interpreted as precluding application of the special margin scheme for taxable dealers in relation to the resale of second-hand passenger vehicles and other motor vehicles purchased from taxable persons who, upon the acquisition of those vehicles, exercised a right to deduct part of the input tax on the purchase, in accordance with Article 86(3) of the Polish Law on VAT.

Decision

Articles 313(1) and 314 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Articles 136 and 315 of that directive must be interpreted as meaning that a taxable dealer is not eligible for the application of the margin scheme where it supplies motor vehicles considered to be second-hand goods, within the meaning of Article 311(1)(1) of that directive, which it has previously acquired exempt from VAT from another taxable person which had only a right of partial deduction of input VAT paid on the purchase price of those vehicles.

Summary

The CJEU has ruled that a taxable reseller cannot apply the profit margin scheme if he supplies vehicles that are considered to be used goods and the supplier has been able to partially deduct the input tax.

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