VAT: Lennartz accounting: restricting application and securing revenue
The measure
Under the so called 'Lennartz mechanism' VAT on immovable property, boats and aircraft can be recovered in full, notwithstanding that the asset is to be used for both business and non-business (or private) purposes. VAT is then effectively paid back over a number of years to reflect the non-business (or private) use.
The changes introduced will mean that VAT will only be recoverable to the extent that the asset is used for business purposes. Changes in the degree of private use in subsequent years will result in VAT adjustments.
Pre-existing Lennartz arrangements will be allowed to continue at the taxpayer's choice but the taxpayer will be legally required to continue accounting for VAT on non-business or private use.
Who will be affected?
Businesses which use assets such as buildings, boats and aircraft for both business and private purposes. Also, although they are no longer permitted to use the Lennartz mechanism, further and higher education institutions and charities will, under this measure, be obliged to continue accounting for VAT on assets which benefitted from this treatment unless they opt to unwind the Lennartz VAT accounting altogether.
When?
The changes will apply from 1 January 2011.
The European Law change that underlies this change in the UK law effectively reverses a long standing European Court of Justice judgment. Taxpayers will lose the benefit of a cash flow saving previously available when they buy assets to be used for both business and non-business/private purposes.
