UK VAT Policy changes - Mazars - United Kingdom
UK VAT Policy changes
With effect from 22 January 2010, HM Revenue and Customs announced that they have made changes to UK VAT policy. These changes affect any VAT registered person who makes a mixture of business and non-business supplies and has used the “Lennartz” accounting mechanism or is considering using it in the future. Therefore, this will affect charities and other not-for-profit bodies.
It will not affect taxable businesses who are using the asset for private use, as they can continue to use the “Lennartz” accounting mechanism.
These changes are based on the recent judgement in the Vereniging Noordelijke Land-en Tuinbow Organisatie (“VNLTO”) v Staatssecretaris van Financien (C-515/07 case).
The case considered whether or not the “Lennartz” accounting mechanism could be used by a taxpayer who undertook certain non-business activities. HMRC now believe that “The Lennartz” accounting mechanism will only apply in a limited number of cases.
What is Lennartz Accounting?
Following the decision in the case of Lennartz v Finanzamt Munchen III (C-97/90, [1995] STC514), (“Lennartz”) it was accepted that where a person purchased an asset for both business and private/non-business use, the person could choose to recover the input tax at the point of purchase and adjust for the non-business or private use over the economic life of the asset.
In the UK the economic life of an asset is determined as 10 years for land and property and 5 years for other assets.
What are the actual changes being introduced?
From 22 January 2010, HMRC consider that the “Lennartz” accounting mechanism is only available where:
• The purchases are used in part for making supplies in the course of an economic activity that gives rise to a right to input tax deduction and
• They are also to be used in part for the private purposes. HMRC consider that a “non-business” use of an asset by a charity will no longer qualify.
What should you be doing now?
1. Assets subject to existing “Lennartz” accounting mechanism arrangements
If you have already applied Lennartz you may continue to account for VAT on this basis in respect on the assets concerned. Where this option is taken, you must undertake to honour the full on-going commitment to account for the output tax.
If you do not choose to continue to use the Lennartz mechanism for existing assets you must unravel the Lennartz mechanism and adjust the input tax claimed and output tax paid accordingly. You will need to contact HMRC to agree a fair way of doing this and we would advise that they contact a VAT specialist before making the contact in order to ensure that a fair basis is proposed.
2. If you have committed to projects in anticipation of the availability of the “Lennartz” accounting mechanism
HMRC will consider claims from taxpayers who have entered into binding commitments for projects on the understanding that the Lennartz accounting mechanism would be available. You will need to contact HMRC to discuss this and we would advise that this is discussed with a VAT specialist before contact is made.
3. Fleming claims
If you have submitted a Fleming claim on the basis of the Lennartz accounting mechanism HMRC will review the claim. It’s likely that the claim will now be rejected by charities who have made a claim
using their non-business (but not private) income to support the calculations.
It’s possible that HMRC’s narrow interpretation of this case will be challenged through the Courts and overturned.
If you think you will be affected by this change in policy, please contact a member of the National VAT Team.
Geraint Lewis, Tel: 01908 680780
David McDonnell, Tel: 020 7063 4315
Jacki Wells, Tel: 07794 031392
National contact
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