When to apply the Second Hand Margin Scheme (SHMS)


An Italian watch supplier sells watches to a Cyprus Company, the Cyprus Company sells the watches to a Polish business customer. The watches are transferred by the Italian supplier directly to Cypriot’s Polish client.

The Italian supplier

Assuming that the Italian supplier sells under the Second hand Margin Scheme (SHMS) (see below for conditions for using the MS), they must account for Italian VAT on the difference between the purchase and selling price. He notifies the buyer by quoting on his invoice:

‘No VAT has been or will be claimed regarding the goods sold under this invoice’ and also Article 26a of Directive 77/388/EU “Profit Margin Scheme”.

The Cypriot buyer

Where the Cypriot buyer buys second hand goods from an Italian supplier, he must also account for VAT under the SHMS, also in Italy. For this reason, he must register in Italy and account for VAT on the margin. This is logical because if no such registration is effected, the profit made by the Cyprus buyer will remain untaxed.

Where for example the Italian buys a watch for 800 and sells for 1,000, he pays VAT on the margin i.e. 200X22% = €44 (for the purposes of the example the Italian rate is 22%).

The Cypriot buyer buys from the Italian €1,000 and sells €1,300 to the Polish end customer. Because the watch never arrives in Cyprus, no VAT is demanded by the Cyprus VAT Authorities. However, the profit made by the Cyprus buyer must be taxed somewhere otherwise it will remain untaxed. The country which will be asking to tax the margin made by the Cyprus Company is most likely to be Italy in which the first margin scheme supply originates.

We suggest checking the above with Italian VAT professionals 

The Polish end customer

Where the Polish end customer will sell the goods which he acquired from the Cypriot supplier and the invoice shows that the watches are taxed in Italy under the margin, he will also sell them under the margin applying Polish VAT.

Where goods are sold under the margin no VIES or Intrastat tables need to be prepared.

If the Cyprus buyer has included second hand goods on a VIES statement, he must submit a corrective VIES statement

A. Conditions of the scheme (Paragraph 8 (3) of 316/2001)

A business may opt to use the margin scheme (MS) for eligible goods (work of arts, antiquities, collectors’ items, and second-hand goods – Paragraph 8 (2) of 316/2001) and account for VAT on the profit if the following conditions are met:

  1. That the taxable person has taken possession of the goods by virtue of a-
    1. supply in respect of which no VAT was chargeable under the VAT Act – E.g. from private individuals and unregistered businesses (exempt businesses)
    2. supply on which VAT was chargeable on the profit margin under the Cyprus MS (Paragraph 8(1)) or under the corresponding provisions in another EU country
    3. transaction other than a transaction for the transfer of a business as a going concern, which considered as not a transaction pursuant to Paragraphs issued by virtue of Article 8(3) of the Act (316 2-7, 13-14, 368/04 Temporary importation, 369/04 Tax warehousing)
    4. transaction involving the transfer of a business at a going concern if the transferor gain possession of the goods under any of the circumstances of this subparagraph (8(3)(a))
    5. transaction, where the goods are WA, on a supply or acquisition from another MS, from the creator or his successor in title (whether or not the invoice shows VAT separately)

B. Acquisitions from other EU countries

The MS is available throughout EU. Eligible goods sold under the scheme in any EU country are taxable in the country of origin rather than of destination and are not subject to the normal distant selling rules.

  1. Goods purchased from a private individual in another EU country

No Vat is due when brought into Cyprus and the goods can therefore be sold under the MS


A Cyprus dealer of Second-Hand Goods (SHG) acquires a watch from an individual established in the EU. No VAT is accounted for when the watch is brought into Cyprus and when sold by the Cypriot watch dealer, VAT can either be accounted on the margin or on the full selling price

  1. Goods purchased from a registered business in another EU country under the MS

Goods purchased from a dealer in another EU country can only be sold under the MS if the goods are supplied by the dealer under the MS.


  1. A Cyprus watch dealer purchases a watch from another watch dealer established in Greece. The Greek watch dealer applies the margin. The Cyprus watch dealer does not account for Cyprus VAT and when he sells the watch he may elect to account on the margin.
  2. A Cyprus WOA dealer purchases a watch from another watch dealer established in Greece. The Greek watch dealer does not apply the margin. The Cyprus watch dealer must account for 19% Vat on the acquisition value and must charge VAT at 19% on subsequent sales. He cannot opt to account for VAT on the margin as the watch is not
    1. Sold by the Greek dealer under the margin or
    2. Imported from a third country

C. Imports from outside the EU

Vat is normally due on importation of second-hand goods and such goods cannot be sold under the MS except in the case of certain WA, antiques, collections and collectors pieces which are entitled to reduced valuation. The imported is entitled to either sell the goods under the MS or under the normal rules.

D. Bulk purchases (Paragraph 9 of 316/2001)

Where several eligible items are purchased for a single price but intended to be sold separately, the purchase price must be fairly and reasonably apportioned assigning a cost price for each item which is entered in a stock book.


A Cyprus dealer purchases 20 pieces of paintings for a single price. The supplier is established in the EU and his supply falls under the margin. Each of the 20 paintings must be assigned a purchase price and when each item is sold separately, VAT must be accounted for on the margin on each separate sale or global accounting* can be applied.

*Global accounting may be applied if the purchase price is less than €510 and the second-hand items or not Motor Vehicles, crafts or aircrafts

E. Sales to other EU countries

Sales by Cyprus dealers to dealers in other EU countries

  • Sales made under the MS are subject to Cyprus VAT and the relevant invoice for MS sales must be issued.
  • There is no need to obtain the buyers VAT number.
  • No further Vat is due by the dealer buyer in his Member State
  • Alternatively, the goods can be sold under the normal rules in which case the supplier must zero the supply and the buyer must account for local Vat under the reverse charge procedure
  • The buyer cannot sell the WA under the MS

F. Sales by Cyprus dealers to private individuals in other EU countries

Such sales might be taxable in Cyprus under the margin unless the supplier elects not to apply the margin i.e. charge VAT on the full selling price. In this case the distant sales provisions may apply

200 Archiepiskopou Makariou III Avenue,
1st Floor, Office 102,
2311 – Lakatamia, Nicosia, Cyprus

T: +357 22276000 | F: +357 22270807

[email protected] | www.mcmillanwoods.com.cy

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