Abolition of Lennartz accounting confirmed – further legislation to be introduced this year

Hartley Foster, Tax Partner, Olswang

In the March 2010 Budget, it was announced that the government would introduce legislation, in a Finance Bill to be introduced as soon as possible in the next Parliament, to implement EU changes abolishing the Lennartz rule on VAT input tax recovery on the purchase of an interest in real property, boats and aircraft. Budget Note 50 set out the changes; these included that amendments would be made to VATA to restrict the application of Lennartz accounting, so as to ensure that VAT recovery is restricted to the business use of assets such as land, yachts and aircraft. That VATA will be so amended was reconfirmed today.  Budget Note 42 supersedes Budget Note 50 (they are in almost identical wording).

Just to recap:

So-called ‘Lennartz accounting’ allows taxpayers to treat a new asset as a wholly business asset, even if there will be some non-business use of that asset. Lennartz accounting can be applied to, for example, leasehold and freehold interests in land and buildings, yachts and aircraft.

If goods are used for both a business and a non-business purpose, there is a choice about how to treat them for VAT purposes (which must be exercised at the time that the goods are acquired), namely:

(i) as a wholly non-business asset (in which case the VAT is not deductible); or

(ii) as a part business, part non-business asset (in which case the VAT incurred is only deductible to the extent that it relates to the taxable business activities (under s.24(5), VATA); or

(iii) as a wholly business asset, in which case the VAT incurred is treated as input tax and is deductible in full, subject to any partial exemption restriction, and output tax must be declared in so far as the goods are used for non-business purposes (the ‘Lennartz‘ approach)

If Lennartz accounting is adopted, the taxable person can benefit from a cash-flow advantage – he can recover all the VAT incurred on the asset immediately and then account for VAT on the deemed self-supply in respect of the non-business use over the economic life of the asset, thereby spreading the cost of irrecoverable VAT over the economic life of an asset. However, as against that, the taxable person must monitor use of the asset, so as to account for the deemed self-supply. 

In Vereniging Noordelijke Land-en Tuinbouw Organisatie (C-515/07), the ECJ held that ‘business’ in the context of Lennartz accounting includes use for any activity that forms part of the wider purpose of the taxable person’s undertaking or enterprise, even where those activities are not “economic activities” (and are so outside the scope of VAT), and that are not normally regarded as ‘business’ for UK VAT purposes.

Following that decision, HMRC indicated that Lennartz accounting will not be available where goods are used (or to be used) for both economic activities and non-economic business activities.

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