VAT margin scheme – can you trust your supplier?

In recent days, the General Court of the European Union (the “General Court”)1 ruled on whether a reseller’s good faith must be taken into account when applying the VAT margin scheme. The question was whether a taxable person may be denied the right to apply the scheme after purchasing goods from a supplier who applied the VAT margin scheme, if it subsequently turns out that the supplier was not entitled to do so. The answer is also relevant to businesses applying the VAT margin scheme in Poland.  

Can the conclusions of the General Court’s judgment in Case T-569/25 [X-GmbH] also be applied to supplies taxed under the general VAT rules, particularly as regards reliance on information provided by the supplier (e.g. the applicable VAT rate)? I will also seek to answer this question. 

Background to Case T-569/25 

The German company X-GmbH was engaged in the retail and wholesale trade of jewellery and watches. In its VAT returns for 2013–2014, the company applied the VAT margin scheme to the resale of certain goods (watches). Following an audit, the German tax authority found that the company’s suppliers had incorrectly applied the scheme because the watches were new. As a result, the authority also challenged X-GmbH’s right to account for VAT under the margin scheme. The company disagreed, arguing that its good faith and reasonable belief that its suppliers had acted correctly should be taken into account. 

The case came before a court, which referred the following question to the CJEU: do EU rules permit a national system under which a taxable person’s good faith is assessed only in separate proceedings concerning tax relief, rather than at the stage of determining the amount of tax due? 

Good faith under the VAT margin scheme according to the CJEU 

The issue of good faith on the part of a taxable person applying the margin scheme has already been addressed in the CJEU’s case law, which the General Court took into account in the judgment under discussion. In its judgment of 18 May 2017 in Case C-624/15 [Litdana] CJEU explained the rules governing the application of the margin scheme and the protection afforded to taxable persons acting in good faith. It held that a taxable person cannot be denied the right to apply the scheme solely because their supplier applied it incorrectly, provided that the taxable person received an invoice stating that the margin scheme applied. The right may be denied where the tax authorities establish that the taxable person did not act in good faith or failed to take the reasonable steps that could be expected of them to ensure that the transaction was not connected with tax fraud.

The General Court’s position in the X-GmbH judgment (T-569/25) 

The General Court emphasised that a taxable person is entitled to apply the margin scheme unless the tax authorities prove that the person “did not act in good faith or failed to take reasonable steps to ensure that they were not participating in tax fraud”. 

The General Court further held that splitting the assessment of a taxable person’s good faith between two separate proceedings, as occurred in this case, may make it excessively difficult to exercise the right to apply the margin scheme, thereby infringing that right. Consequently, the General Court found that Article 314 of the VAT Directive, read in conjunction with the principle of effectiveness, precludes a national practice that fails to take a taxable person’s good faith into account when determining the tax liability, allowing it to be assessed only in separate proceedings. 

Significance of judgment T-569/25  

What does this judgment mean for Polish taxpayers? It clarifies and confirms the principles set out in the CJEU’s judgment of 18 May 2017 in Case C-624/15 [Litdana]. In particular, it emphasises that tax authorities should take a taxable person’s good faith into account at the stage of proceedings concerning the determination of the tax liability. This involves assessing whether the taxable person knew or should have known that the supplier had incorrectly applied the VAT margin scheme and whether the taxable person took reasonable precautionary measures. This is important for businesses applying the VAT margin scheme because, in practice, they often have very limited (or no) means of verifying whether their supplier has applied the scheme correctly. 

The judgment under discussion concerns a specific procedure under German law. However, its significance for Polish taxpayers should be considered alongside the judgment in Case C-624/15 [Litdana]. From a Polish perspective, the key point is the recognition and confirmation of the importance of a taxable person acting in good faith. The General Court’s judgment in Case T-569/25 [X-GmbH] confirms that a taxable person cannot be denied the right to apply the VAT margin scheme solely because the supplier relied on incorrect information obtained from its own suppliers. What matters is whether the taxable person acted in good faith and took reasonable steps to ensure that they were not participating in tax fraud. 

Can the case law on good faith under the VAT margin scheme be extended to other VAT issues, such as determining the applicable VAT rate by reference to the rate applied by the supplier? There appears to be no direct legal basis for such an extension. The VAT margin scheme has specific features: a taxable person’s eligibility to apply it depends on whether the conditions relating to the preceding supply, set out in Article 314 of the VAT Directive, are satisfied. No equivalent mechanism applies to reduced VAT rates. For example, the right to apply the 8% VAT rate does not depend directly on whether the supplier applied that rate. Accordingly, the principles established in the case law on the margin scheme should not automatically be transposed to other VAT issues. Nevertheless, this judgment adds to the body of case law highlighting the importance of a taxable person’s good faith when determining eligibility for a tax advantage, suggesting that the issue is becoming increasingly significant in VAT practice. 

Note: A judgment of the General Court may be subject to the special review procedure before the CJEU. The First Advocate General has one month from the date of the judgment to request that the CJEU review it. Once that period has expired, the judgment cannot be altered.