June Budget – VAT lennartz accounting
The VAT rules which allowed for full VAT recovery on the purchase of certain business assets used for both business and private or non-business use are to be changed. Using the ‘Lennartz mechanism’ a business could opt to recover all the input tax (subject to any partial exemption restriction) on the purchase of immovable property, boats and aircrafts up-front and make subsequent output tax adjustments to reflect any private or non-business use.
From 1 January 2011 VAT recovery on the purchase of assets will be restricted only to the business use of the asset. Changes to the capital goods scheme will also be introduced to take into account changes in private use over subsequent years.
Existing Lennartz arrangements will be allowed to continue and new revenue protection legislation will be introduced to ensure that businesses correctly account for VAT due on non-business and private use of the asset in question.
This change will remove a significant cash-flow benefit for many businesses that benefitted from being able to recover all the input tax incurred on the purchase of an asset up-front and then making subsequent output tax adjustments to reflect private or non-business use.