VAT on immovable property, boats and aircrafts
The VAT rules which allowed for full VAT recovery on the purchase of certain business assets used for both business and non-business use are to be changed. Using the ‘Lennartz mechanism’ a business can 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. HMRC have published draft legislation which amends the VAT partial exemption and capital goods scheme regulations to implement the necessary changes. Businesses interested in commenting on the draft legislation should do so by 30 November 2010.
Going forward 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 any private or non-business use.