VAT mixed-use ECJ decision
A recent ECJ judgement has cast doubt on the use of the “Lennartz” mechanism which is commonly used to reduce VAT costs in various sectors including charities and educational institutions. The “Lennartz” mechanism allows for a full deduction of VAT incurred on an asset which will be used partly for business and partly for private or non-business use. Using the “Lennartz” mechanism output tax is then accounted for as and when a private or non-business use arises.
The ECJ case concerned an association of Dutch farmers which provided its farmer members with services designed to promote their general interests at local, provincial, national and international levels. This was a non-business activity for VAT purposes. The association also provided services within the scope of VAT. The association argued that it should be allowed to use the “Lennartz” mechanism 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.
This case is likely to affect many charities and bodies that have both business and non-business activities although HMRC’s reaction to the case is awaited.