Charity shops and VAT

Sales of second-hand goods are usually dealt with under the margin scheme, so that VAT is not charged more than once on the same consumer item. Where goods are donated, that purpose turns out to be missed in practice.

Charity shops play an important part in the circular economy. They extend the life of products and offer work to people who find it hard to enter the labour market. Sales of second-hand goods are usually dealt with under the margin scheme: VAT is then due on the difference between the selling price and the purchase price, the margin.

Case study: the charity shop De Schatkamer

De Schatkamer is a thriving charity shop full of forgotten gems. Its manager, Jan, offers a supportive workplace and the daily work consists of receiving goods, checking whether they are usable and selling them. Jan struggles with one problem: the VAT charge feels unfair.

Most items arrive as donations. Mr De Vries, for instance, donated a beautiful, rare vase. The purchase price is therefore nil. The vase proves popular and Jan sells it for € 400. The profit margin equals the whole selling price, so Jan pays 21% VAT on the entire proceeds of a donated item. Had a purchase price of, say, € 200 been paid, he would only have had to account for VAT on the € 200 margin he added.

VAT has in many cases already been paid on the goods that are donated. That is why it feels unfair to Jan that VAT is due again on the full value when they are sold. Given that charity shops exist to give used items a second life, he considers a reduced rate or an exemption more appropriate.

The District Court of Gelderland ruling

In 2022 a charity shop in Gelderland decided to change its way of working. The foundation behind the shop wanted to benefit from the margin scheme. Donated goods would be bought on paper at a set price, and that amount would then be donated by the donor. This created a purchase price, so that less VAT would be due under the margin scheme.

In theory it seemed watertight: goods were bought, paid for and given back. In practice it went differently. The shop actually paid no one, and not a single donor asked for payment or a receipt for the supposed gift.

When the foundation applied the margin scheme in its VAT return for July 2022 and claimed a refund, the Dutch Tax Administration refused. The foundation objected and then appealed. The court found that the shop had paid no consideration, that donors were unaware of the arrangement and that there was no genuine freedom of choice. The purchase price existed only on paper. The court therefore held that the margin scheme could not be applied in this way. VAT had to be calculated on the full selling price.

Why this matters in practice

In practice the ruling means that the margin scheme requires a purchase price that has actually been paid. The Netherlands gives charity shops no room to value donated goods at a notional purchase price. An appeal has been lodged against the ruling.