Anyone who buys used cars from private individuals and resells them cannot avoid the margin scheme. It saves VAT but comes with clearly defined requirements and its own rules for invoicing and bookkeeping. Here, we explain how it works and what matters in bookkeeping. Assessing individual cases remains the tax advisor’s job.
Why there is a special rule
When a dealer buys a car from a private individual, they do not pay VAT because private individuals do not issue invoices with tax. So the dealer cannot deduct any input VAT either. If the dealer charged VAT on the full selling price, the value of the vehicle would be taxed twice: once when the private individual originally bought it new, and once on resale.
The margin scheme under § 25a UStG solves this problem. Tax is levied not on the entire sales price, but only on the difference between the sales price and the purchase price, that is, the dealer’s margin. For the used-car trade, this is the basis of the business model in many cases.
How the margin is taxed
The tax base is the selling price minus the purchase price. The VAT is included in the margin and is calculated out of it; it is not added on top.
- Purchase from a private individual: 10,000 euros
- Sale to a customer: 12,380 euros
- Margin: 2,380 euros
- VAT included in this amount: 2,380 euros divided by 1.19 times 0.19, which equals 380 euros
- Dealer’s net margin: 2,000 euros
For comparison: If fully taxed, the sales price of 12,380 euros would include just under 1,977 euros in VAT. The difference shows why correct application is so important.
The margin is calculated individually for each vehicle. If a dealer sells a vehicle below the purchase price, the margin is zero. A loss on one vehicle cannot be offset against a profit on another.
The requirements
The margin scheme cannot be applied to every vehicle. The most important requirements are:
- Reseller: you trade in used vehicles on a commercial basis
- Purchase within the EU: the vehicle was purchased within the EU
- Purchase without VAT: the seller did not owe VAT or did not show it on the invoice, for example a private individual, a business under the small business scheme, or another dealer who sold the vehicle under the margin scheme
If you buy a vehicle from a business that issues you an invoice showing VAT, the margin scheme generally cannot be used for that vehicle. You can then deduct the input VAT and sell the vehicle with standard taxation. This is exactly where most errors occur in practice: A vehicle is bought with VAT shown on the invoice but is still resold under the margin scheme.
Whether a vehicle may be sold under the margin scheme is a tax question for the tax advisor to assess. Bookkeeping makes sure that the purchase receipt for each vehicle is on file and that anything unusual is reported early.
Purchases from dealers and from abroad
Not every vehicle comes from a private seller. If you buy from another dealer who sells under the margin scheme and notes this on the invoice, you can generally resell the vehicle under the margin scheme as well. The purchase receipt is crucial: It must refer to the special rule and must not show any VAT.
When you buy from dealers in other EU countries, it also depends on how the foreign dealer sold the vehicle. If the dealer applied their country’s margin scheme, you can resell under the margin scheme. If the dealer supplied the vehicle to you VAT-free, this is generally an intra-community acquisition: you owe acquisition tax in Germany and resell the vehicle with standard taxation. Separate rules apply to new vehicles. The tax advisor classifies each purchase.
Trade-in
If a customer trades in their old vehicle when buying, there are two transactions: You sell one vehicle and buy another at the same time. The traded-in vehicle is recorded as a vehicle in its own right at its purchase price and can later be sold under the margin scheme if the requirements are met.
Be cautious with generous trade-in credits: If the trade-in value assigned to the old vehicle exceeds its actual value, this may constitute a hidden price reduction. This can affect both the sales price of the new vehicle and the purchase price used to calculate the subsequent margin. Therefore, document how the trade-in value was determined; your tax advisor will assess this.
What goes on the invoice
Under the margin scheme, VAT must not be shown separately on the invoice. Instead, the invoice must refer to the special rule, for example with the German wording “Gebrauchtgegenstände/Sonderregelung,” which means second-hand goods, special scheme. This tells the buyer that they cannot deduct input VAT from this invoice.
If a dealer shows VAT anyway, they owe the amount shown in addition to the tax on the margin. Such an error can be costly. So check the templates in your dealer software to keep margin-scheme sales and standard-taxed sales clearly separate.
Repairs, reconditioning, and incidental costs
A common misunderstanding concerns costs incurred after the purchase. Repairs, reconditioning, vehicle inspections, transportation, or registration do not increase the purchase price that is deducted when calculating the margin. The margin is calculated solely as the selling price minus the purchase price.
On the other hand, you can generally deduct the input VAT from the invoices for these services if they are issued properly. In the books, these costs are therefore recorded separately from the vehicle purchase but allocated to the vehicle. This way, you can still see what a vehicle cost in total and what it brought in.
Exports and sales to other EU countries
Many dealers sell vehicles abroad. For exports to countries outside the EU, a tax exemption may apply even under the margin scheme, provided the export is documented.
The situation is different for deliveries to other EU countries: The tax exemption for intra-community supplies is generally excluded for sales under the margin scheme. The margin is then taxed in Germany. The tax advisor assesses whether, in individual cases, it makes sense to opt out of the margin scheme in order to make tax-exempt deliveries.
For accounting purposes, this means: For every export, the supporting documentation must be complete, and it must be clear whether the vehicle was sold under the margin scheme or the standard tax regime. If documentation is missing, a tax-exempt sale may subsequently become a taxable one.
Posting by vehicle
For sales under the margin scheme, sales prices, purchase prices, and tax bases must be recorded separately. In practice, this means each vehicle gets its own file, and every entry carries the vehicle identification number.
- Purchase: purchase agreement, copy of ID or invoice from the seller, vehicle identification number
- Post-purchase costs: repair shop, reconditioning, transport, registration, all allocated to the vehicle
- Sale: invoice noting the special rule or showing the tax amount
- Export: proof of export or proof of arrival and buyer information
- Inventory: list of all vehicles on the lot at month-end, reconciled with the books
With this structure, you can see the gross profit per vehicle each month, and your tax advisor will find everything they need for VAT. You can find out how we organize this on the car dealerships and auto repair shops page.
Common mistakes and how to avoid them
- Selling a vehicle under the margin scheme despite VAT on the purchase invoice: check purchase receipts before the sale
- Showing VAT on a margin-scheme invoice: separate the invoice templates
- Adding repairs to the purchase price: post repair costs separately and claim the input VAT
- Offsetting negative margins: calculate the margin per vehicle, losses count as zero
- Missing export documentation: collect documentation before a security deposit is refunded to the buyer
- Not reconciling inventory: reconcile the vehicle list with the books every month
If such errors have built up over months, catch-up bookkeeping can sort them out vehicle by vehicle before the tax advisor prepares the annual financial statements.
Sources
Laws and bodies named in the article. The legal texts link to gesetze-im-internet.de, in German.
This article is for general informational purposes only and does not constitute tax or legal advice in specific cases. A tax advisor is responsible for tax-related questions.