EU court requires good-faith claims to be considered in VAT margin-scheme assessments

The dispute concerned a German jewellery and watch retailer and wholesaler, including online sales, which used the margin scheme in its 2013 and 2014 VAT returns. Following an audit, the tax authority recalculated VAT on the full consideration for certain watch sales because the suppliers had wrongly applied margin taxation. The lower tax court rejected the company’s challenge without examining whether it could reasonably rely on the suppliers’ invoices.^[1]

Under Articles 314 and 315 of Council Directive 2006/112/EC, the scheme applies to specified supplies by taxable dealers where the goods come from qualifying suppliers. VAT is calculated on the dealer’s selling-price/purchase-price margin, less the VAT attributable to that margin. German law implements the scheme through section 25a of the Umsatzsteuergesetz. This judgment interprets the Directive in the version applicable to the dispute, as amended by Directive 2010/45/EU; it does not enact a new margin-tax regime.^[1][2]

The Court held that Article 314, read with the principle of effectiveness, precludes the practice described: assessing VAT first without considering good faith, while leaving that issue to a separate discretionary procedure and administrative decision. German equitable-relief provisions allow a lower assessment or remission in appropriate cases, but the issue here was the procedural protection of a right derived from EU law.^[1]

The Court identified potentially duplicated adviser and court costs, delays of several years, and differences in how evidence is examined. The referring Bundesfinanzhof must make the relevant national-procedure checks, including whether costs are disproportionate and could deter a challenge relative to the disputed liability. The judgment is not a final determination that X-GmbH itself qualifies for margin taxation.^[1]

Good faith is not an unconditional exemption. Protection can be refused where the authorities establish bad faith or failure to take reasonable measures to avoid participation in VAT fraud. For groups operating resale businesses, the practical consequence is to preserve supplier invoices and reasonable-check evidence and ensure that any good-faith case is addressed in the VAT assessment dispute, rather than being excluded solely because a separate equitable-relief route exists.^[1]