VAT mixed-use of assets
HMRC have published their revised policy on "Lennartz" accounting following a recent ruling by the European Court of Justice (ECJ).
The case concerned an association of Dutch farmers that provided its farmer members with services designed to promote their general interests. This was a non-business activity for VAT purposes. The association also provided services within the scope of VAT and argued that it should be allowed to use the Lennartz accounting facility but the ECJ disagreed.
The ECJ decision examined where expenditure is incurred for both business and non-business purposes and ruled in a surprising decision that VAT must be apportioned accordingly i.e. no full deduction of VAT at the outset.
The implications of this case severely restrict the availability of using the Lennartz accounting methods. With effect from 22 January Lennartz accounting will only be available where:
- The goods are used in part for making supplies in the course of an economic activity that give a right to input VAT deduction (broadly, taxable supplies, supplies that would be taxable if made in the UK, or certain financial and insurance supplies to non-EC customers); and
- They are also used in part for the private purposes of the trader or his staff, or, exceptionally, for other uses which are wholly outside the purposes of the business enterprise or undertaking.
HMRC have also introduced flexible arrangements for businesses operating Lennartz accounting arrangements on assets purchased prior to the change in policy. This will effectively allow businesses to continue operating the Lennartz principles as before for the life of the assets concerned. HMRC will also consider claims made in writing to use Lennartz from businesses that had entered into binding commitments prior to 22 January 2010 for projects on the understanding that Lennartz accounting would have been available.
Businesses that are not permitted to use the Lennartz principles must apportion any VAT incurred for both economic and non-economic activities on the basis of use and intended use from 22 January 2010.