Accounting practices

What is differential taxation?

The purpose of differential taxation is to ensure that VAT is not charged again and again for one and the same item if the good has already lost value in the meantime. This is the case, for example, when a smartphone is resold second-hand. The differ

In order to provide you with an overview of this important topic, we have taken a closer look at how the differential tax works and what needs to be taken into account in practice.

What is differential taxation?

Difference taxation changes the basis of calculation for VAT when a used movable good is resold. The procedure is such that sales tax is not calculated from the total amount of the sales price, but only the difference between the purchase and sales price serves as the basis for calculation. This results in a much lower sales tax payment amount.

There are now some concrete examples, respectively different use cases, which we will discuss in more detail.

Reseller

The first requirement for differential taxation, which entrepreneurs must observe, is that no VAT must have been incurred on the purchase of the goods. This means that the object of purchase was purchased from a small business or private individual that is exempt from VAT. A good example here would be a used car purchased by a dealer from a private individual. Resellers are companies that specifically purchase used items in order to resell them commercially.

Deliveries within Germany or the EU

The purchase of the goods concerned must take place in the domestic country or in the EU territory. In the case of a purchase of goods from third countries, there are only individual exceptions, for which special applications would have to be made.

Acquisition without sales tax

As described above, the purchase of the goods to be resold must be made without VAT so that the margin scheme can be applied later. Whether the purchase is made by a private individual or by a company that is exempt from VAT is irrelevant. Theoretically, the item can also be from another business that has also applied the margin scheme.

Intra-Community acquisition

If there is an intra-community acquisition, the margin scheme is unfortunately not applicable. The intra-Community acquisition would be the case, for example, if a company from Austria sells to a company from Germany and places a corresponding note on the invoice regarding the intra-Community acquisition (reverse charge procedure).

Place of delivery and tax exemptions

In the case of resale, the place of delivery must be taken into account. The differential taxation can also be used if the delivery is made from Germany to the Community territory, in which case the differential taxation must always be applied in Germany and the reverse charge procedure is thereby suspended. It is therefore clearly not possible to simultaneously include a reverse charge reference on the invoice and use the differential taxation option at the same time. All other tax exemptions continue to apply even if the margin scheme is used. However, the standard tax rate is then applied.

This can be explained more simply with the help of an example: If a company from Germany buys a used item from a private individual from Germany and subsequently sells this good to a private individual in another EU country, there is no tax exemption for the entrepreneur if the margin scheme is applied. Instead, the entrepreneur must pay the lower tax determined in Germany.

Used goods

For the differential taxation to apply, the goods do not necessarily have to be used goods. However, it is a prerequisite that they are movable consumer goods that have lost value in the meantime. This means that precious metals are also exempt from the margin scheme. Thus, it must really be everyday objects, regardless of whether it may be a car, a smartphone, or furniture.

No applicability of the margin scheme

Thus, the margin scheme is not applicable in various cases. The first requirement is that the purchase is made without sales tax. Thus, it must be a private person selling or a VAT-exempt company. An intra-Community acquisition cannot be combined with the margin scheme. Also exempt are precious metals and items that the entrepreneur himself brings into the business, for example, if he has inherited these items.

But enough of the theory, because especially with such a dry topic, the practical application is best understood when working with concrete examples. That is why we will now show you how differential taxation is applied in practice.

How to apply the margin scheme - this is how it works
So how can the margin scheme be used in practice to avoid paying unnecessary amounts of tax? Below we have prepared some practical examples for you.

Calculating the total difference

Calculating the total difference is easy. The sum of all purchase prices spent on the purchase of goods is formed. Likewise, you form the sum of the proceeds from the goods, which are resold in this period. The sum is always calculated on the basis of the taxable period. It is always the period that is relevant, not the good. This means that a used product can be bought in one period and resold in a later period. The difference between the two sums described is called the "total difference", from which the included VAT is then calculated. Note: The total difference is not yet the tax base, but the gross amount. The sales tax is therefore not included in the calculation basis but is deducted. The calculation of the sales tax is therefore based on the net amount.

Tax rate

With regard to the tax rates used for the calculation, either 19 percent is to be assumed or there is a reduced tax rate, which is usually 7 percent.

Differential taxation for motor vehicles

A big issue is a differential taxation when we think about the car trade. Here it is common for a dealer to take a used car in payment and the customer simply pays a correspondingly lower purchase price for the new car.

The procedure with regard to sales tax is clearly regulated. Differential taxation is so often applied here because the dealer first buys from a private individual who cannot issue an invoice with sales tax and then resells the vehicle himself, typically again to a private individual.

What does the process look like in detail? Let's assume that a car dealer pays 5,000 euros for a used vehicle. He sells it on to a private individual a little later and receives 6,500 euros in cash in return. The difference amounts to 1,500 euros. The sales tax included in this is determined, it is 239.50 euros. This is now deducted, since the assessment basis for the differential taxation is the net amount. The taxable amount is therefore 1,260.50 euros.

Differential taxation for cell phones

Exactly which item is bought and sold is irrelevant for the differential taxation, as long as the requirement that it is a movable consumer good is met. Thus, smartphones are of course also covered by the margin scheme. They are another good example, as it is often the case here, similar to the vehicle trade, that dealers take used products in payment.

The procedure for determining differential taxation is exactly the same as previously described in the area of vehicle trade. The decisive factor is the difference between the purchase price and the sales price. The sales tax included is deducted from this difference and this is how the assessment basis for the differential taxation is calculated.

Differential taxation sample

If you are an entrepreneur who has to deal with differential taxation, again and again, you can create a simple scheme for it. This is even possible as a simple Excel spreadsheet, for example, since the calculation itself is not complex. It is important that the records are always determined according to the periods under consideration for the tax. The amounts paid for the products must be recorded and the resold goods with the corresponding prices are entered. The calculation of the difference is simple, subsequently only the included sales tax has to be deducted.

Attention: use the correct tax rate!

The sample for the calculation of the differential taxation is already finished because, after the calculation of the included VAT, the calculation basis for the differential taxation already remains.