Selling an asset with a negative margin - when is it possible?

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In their business activity, entrepreneurs use fixed assets, which are often sold during their conduct. In principle, the sale of a fixed asset is subject to taxation under VAT. However, in certain situations, a margin VAT procedure can be used, which can prove to be extremely beneficial. In such a situation, what does the sale of the fixed asset look like with a negative margin?

As a rule, sales should be taxed in the case of fixed assets. Only when two conditions are met at the same time can an exemption be applied:

  1. the fixed asset was used only for exempt activities,

  2. the taxpayer was not entitled to reduce the amount of tax due by the amount of input tax when purchasing the car (purchase contract, VAT invoice, margin, invoice with the "ex." rate)

- Art. 43 sec. 1 point 2 of the VAT Act

Thus, even if a fixed asset was acquired as exempt or its acquisition was not subject to the VAT Act at all, its sale will be subject to taxation.

Sales margin

The provisions of the act on tax on goods and services provide for the application of a special taxation procedure for the supply of - inter alia - second-hand goods, consisting in taxing the margin. This is an exception to the general rule of taxation of turnover, i.e. the amount constituting the payment for the sale less the amount of tax due.

According to Art. 120 paragraph 4 of the VAT Act, in the case of a taxpayer supplying second-hand goods, works of art, collectors' items or antiques previously purchased by that taxpayer as part of his business for resale, the taxable amount is the margin constituting the difference between the sale amount and the purchase amount less the tax amount .

For the purposes of applying a special procedure for the supply of second-hand goods, the legislator, in Art. 120 paragraph 1 point 4 of the Act determined that second-hand goods are tangible movable goods suitable for further use in their current state or after repair, other than those specified in points 1-3 and other than precious metals or precious stones (CN 7102, 7103, 7106, 7108, 7110, 7112), (PKWiU 24.41.10.0, 24.41.20.0, ex 24.41.30.0, ex 32.12.11.0, ex 32.12.12.0 and 38.11.58.0).

Taxation under the margin scheme is limited to a certain category of second-hand goods, and it is also important from whom the second-hand goods were purchased.

Taxation conditions in the margin system

In order to use the margin procedure, the car must be purchased from one of the following persons:

  • a natural person, legal person or organizational unit without legal personality, not being a taxpayer, referred to in art. 15 of the VAT Act or a non-taxable person for value added tax (i.e. a taxpayer according to regulations in force in another EU Member State);

  • the taxpayer referred to in the above-mentioned art. 15, if the delivery of this car was exempt from tax pursuant to Art. 43 sec. 1 point 2 (release of second-hand goods) or Art. 113 of the Act on (subjective exemption for small taxpayers);

  • the taxpayer, if the delivery of this car was taxed according to a special margin scheme;

  • a taxpayer of value added tax, if the delivery of the car was tax-exempt on the terms corresponding to the exemption for the supply of used goods or the subjective exemption for small taxpayers;

  • a taxpayer of value added tax, if the delivery of this car was subject to value added tax on the terms corresponding to the special margin procedure, and the buyer has documents clearly confirming the purchase of the car on these terms.

Also, the tax authorities allow the margin procedure in relation to the sale of company property, but their purchase must be accompanied by an intention to resell (when the fixed asset will no longer be used in business). Such a position, among others presented by the Director of the Tax Chamber in Poznań in a letter of April 12, 2016, file ref. ILPP2 / 4512-1-205 / 16-2 / MW:

“(...) The applicant will be entitled to apply the margin taxation procedure when selling the car in question. The conditions for its use, namely the vehicle meets the definition of second-hand goods, pursuant to Art. 120 paragraph 1 point 4 of the Act, and the Applicant purchased the above-mentioned the car on a VAT invoice, the margin, therefore, when selling the car to the Applicant, no VAT was charged, will be met if the Applicant's intention at the time of purchase was to resell the car. Thus, the Applicant will fulfill the instructions resulting from the provisions of the Act on tax on goods and services, allowing for the use of a special taxation procedure when selling the car referred to in the application.

To sum up, when selling a fixed asset (passenger car) - used goods, the purchase of which is not deducted VAT (purchase on a VAT invoice - margin), an Applicant who is an active VAT taxpayer may use the provisions of art. 120 paragraph 1 point 4 of the Value Added Tax Act, and make the delivery using the margin procedure - second-hand goods, provided that the purchase of the vehicle was accompanied by an intention to resell it (...) ”.

Sale of a fixed asset with a negative margin - what VAT?

Very often, the value of an asset at the time of sale is lower than when purchased. In such a situation, a negative margin is created. The tax base and VAT are then 0.

This position is confirmed by the tax authorities, an example of which is the letter of the Director of the Tax Chamber in Poznań of May 6, 2014, no. ILPP1 / 443-97 / 14-5 / AW, which reads:

"(...) It is noted that in the event that the sale amount of the second-hand goods is lower than the purchase amount (there is a negative margin), it is not possible to calculate the tax base referred to in the above-mentioned art. 120 paragraph 4 of the Act. This means that despite the occurrence of a tax obligation for the supply of goods, there will be no output tax on such a transaction (...) ”.