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The profit margin scheme also for parts removed from end-of-life vehicles

2017-01-27

According to the Court of Justice of the European Union, parts removed from scrapped cars may meet a definition of ‘second-hand goods’, and therefore the supplies of such parts will be covered by the scope of application of the profit margin scheme. This is the conclusion of a judgment given on 18 January 2017 in Case C-471/15 Sjelle Autogenbrug I/S v Skatteministeriet.

The case regarded a vehicle reuse undertaking whose principal activity is trading in used motor vehicle parts from end-of-life vehicles, purchased among others from private individuals. The point of dispute was whether parts removed from such vehicles intended to be resold as spare parts may be regarded as ‘second-hand goods’ within the meaning of Article 311(1)(1) of Directive 2006/112.

According to indicated provision, ‘second-hand goods’ means „movable tangible property that is suitable for further use as it is or after repair” (we may find a comparable definition in Article 120.1.4 of the Polish VAT Act). The CJEU noted that it is not apparent from the provision of the Directive that the concept of ‘second-hand goods’, within the meaning thereof, excludes movable tangible property that is suitable for further use as it is or after repair, coming from other property in which it was incorporated as a component. The fact that used property which forms part of other property is separated from the latter does not call into question the characterisation of the property removed as ‘second-hand goods’, to the extent that it may be reused ‘as it is or after repair’.  In addition, in order to be characterised as ‘second-hand goods’, it is only necessary that the used property has maintained the functionalities it possessed when new, and that it may, therefore, be reused as it is or after repair. That is the case of motor vehicle parts removed from an end-of-life motor vehicle, in so far as, even if separated from that vehicle, they maintain the functionalities they possessed when new and may, therefore, be reused for the same purposes. Of essence is here that a motor vehicle is in principle composed of a set of parts which have been assembled and may be removed and resold, as they are or after repair.

Consequently, in view of finding that spare parts from end-of-life motor vehicles constitute ‘second-hand goods’, their sale effected by a taxable dealer is subject to the application of the profit margin scheme, in accordance with Article 313(1) of Directive 2006/112. Under that scheme, tax is chargeable not on the entire amount due from the sale but only on a profit margin understood as a difference between the total amount payable by the purchaser and the purchase price less the amount of tax.

The binding rulings and the case law issued hitherto made it apparent that in order to apply the profit margin scheme, the purchase price of the goods to be sold must be known. So the goods must be individualised because only to such goods the actual purchase price may be attributed. Such interpretation of legal regulations prevented the application of the profit margin scheme for example to the sale of spare parts removed from an end-of-life vehicle – we know the purchase price of such vehicle as the whole but not the purchase price of its individual components  (see: judgment of the Supreme Administrative Court of 28 March 2012, ref. no. I FSK 839/11, judgment of the Regional Administrative Court in Bydgoszcz of 22 February 2011, ref. no. I SA/Bd 1036/10, or recent binding rulings by the Director of Fiscal Chamber in Katowice: of 8 August 2016, ref. no. IBPP2/4512-304/16-1/IK, and of 26 January 2016 r., ref. no. IBPP2/4512-916/15/AB). The CJEU has come to opposite conclusions – as stated in the judgment, the practical difficulties in applying the profit margin scheme cannot justify excluding certain categories of taxable dealers from that scheme, since the possibility of such an exclusion is provided for in neither Article 313 nor any other provision of Directive 2006/112.

The CJEU judgment should have an impact on the position of Polish tax authorities and courts, restrictive to date, as regards the application of the profit margin scheme to the sale of components removed (separated) from vehicles.