Client must prove good faith if authorities challenge VAT margin

Edited by Luca Lavazza and Pier Francesco Berardinelli

In the event that the Italian tax authorities challenge, on the basis of objective and specific elements, the improper usage of the VAT margin scheme by the client, the latter must prove his good faith. This principle, already expressed by the United Sections in Judgment No. 21105 of September 12, 2017, was confirmed by the Court of Cassation in its recent Judgment No. 19555 of July 16, 2024.

The margin scheme, regulated by articles 36 to 40 of Law Decree No. 41/1995, is a special and optional VAT regime, applicable to the trade in second-hand movable goods and objects of art, antiques and collectibles. Under this scheme, VAT is calculated on the difference between the sale price and the purchase one, increased by the accessory and repair costs incurred by the reseller. Thus, VAT applies only on the “margin” realized by the reseller and not on the entire consideration received.

As clarified by the Court, these rules must be interpreted restrictively and applied strictly since they constitute a special regime favorable to the taxpayer, optional and derogatory with respect to the ordinary VAT system.

In the case at hand, the Italian tax authorities served an assessment for CIT and VAT purposes on a car dealership (hereinafter “Alfa S.r.l.”), contesting the fictitious nature of suppliers and the incongruity of the price of some cars purchased and resold.
On a procedural level, the Provincial Tax Court of La Spezia ruled in favor of Alfa S.r.l., while the Regional Tax Court of Liguria affirmed the inapplicability of the special regime because Alfa S.r.l. had allegedly purchased some cars from rental or leasing companies, which, by their nature, use new vehicles, excluded from the scope of the margin regime having not been previously taxed definitively. Alfa S.r.l. therefore appealed to the Court of Cassation against the decision of the Regional Tax Court.

In assessing the objections made by Alfa S.r.l., the Court of Cassation reiterated the previous guideline of the United Sections, according to which, “if the tax administration challenges, based on objective and specific elements, that the client has unduly benefited from this scheme, it is up to the latter to prove its good faith.”
In the Court’s opinion, this means not only proving that the client acted without being aware that he was participating in a fraud, but also proving that he used the maximum diligence that can be required of a shrewd trader in order to avoid involvement in tax evasion mechanisms. The Court of Cassation also specifies that the maximum degree of diligence that can be required should be identified by applying the criteria of reasonableness and proportionality to the concrete case, also considering any elements capable of raising suspicions.

Referring specifically to the used vehicles market, the Judgment at hand includes in the perimeter of the required diligence the identification of the previous owners of the vehicles, within the limits of the data resulting from the registration certificate, possibly supplemented by other elements of easy and rapid availability. This verification must be aimed at ascertaining, even if only presumptively, whether VAT has already been paid upstream by other parties without the possibility of deduction, resulting in the applicability of the special regime.

If so, the right to apply the VAT margin scheme must be recognized, even if the tax authorities prove that the VAT was actually deducted upstream. On the other hand, in the different hypothesis in which it emerges that the previous owners carry out the activity of resale, rental and leasing in the vehicle market, the input VAT paid for the purchase of the cars is presumed to have been deducted, resulting in the inapplicability of the special scheme.

More generally, this Judgment provides confirmation that a prudent supplier and customer selection policy is increasingly essential in order to avoid an incautious purchase or sale. Some examples include purchases and sales that are part of carousel or other fraud schemes, labor-intensive tenders and sales to false regular exporters.