HM Revenue and Customs Brief 02/10
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Issued 22 January 2010
VAT: Lennartz accounting - new policy following ECJ case
Last year, the ECJ in the case of Vereniging Noordelijke Land-en
Tuinbouw Organisatie v Staatssecretaris van Financien (C-515/07) –
VNLTO - considered whether or not Lennartz accounting can be used by a taxpayer
who engages in activities that are not within the scope of VAT. As a result of
this judgment, it is now clear that EU VAT legislation does not give, and has
never given, a right to use Lennartz accounting in circumstances such as those
of the VNLTO case.
Who should read this?
This Brief brings UK VAT policy in line with this judgment and should be read
by anyone currently using, or intending to use, Lennartz accounting. It means
that Lennartz accounting will only be available in the specific, limited
circumstances set out below.
HMRC's policy on Lennartz accounting as set out in Information Sheet 14/07
now has only limited application and should be read in conjunction with this
Guidance in Information Sheet 14/07 states that, where a taxable person
incurs VAT on the cost of goods intended solely for business purposes, there is
an entitlement to deduct the input tax incurred to the extent that it is used
for making taxable supplies (or other supplies carrying a right to input tax
deduction under section 26 of the VAT Act 1994). See paragraph 2.4 of
Information Sheet 14/07 for the types of goods this policy applies to.
If goods are used for both business and private/non-business purposes, there
is a choice about how to treat them for VAT purposes, which must be made at the
time they are acquired, namely:
- as a wholly non-business or private asset, in which case the VAT is not
- 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 (section 24(5) of the VAT Act 1994); or
- as a wholly business asset ( the 'Lennartz' approach) in which case the
VAT incurred is treated as input tax and is deductible in full, subject to any
partial exemption restriction; however, output tax must then be declared in so
far as the goods are used for private/non-business purposes.
Lennartz accounting is not therefore available in cases where goods
(including services used to create goods) are used wholly for business purposes.
The case before the ECJ concerned an association - VNLTO - that promotes the
interests of the agricultural sector. Its members, who are traders in that
sector, pay a membership subscription to it, the greater part of which goes
towards activities designed to promote their general interests. In addition to
promoting those interests, VNLTO provides a number of individual services to its
members for which it charges a fee.
Even though the activities of promoting members' interests are not subject to
VAT, the ECJ held that this did not mean they were non-business activities. The
ECJ stated that 'business' in the context of Lennartz accounting extends beyond
economic activities giving rise to supplies within the scope of VAT. It also
includes use for any activity that forms part of the wider purpose of the
taxable person's undertaking or enterprise, even those activities that are not
economic activities (such as those outside the scope of VAT), and that are not
normally regarded as 'business' for UK VAT purposes.
From 22 January 2010, Lennartz accounting will only be available where:
(a) the goods are used in part for making supplies in the course of an
economic activity that give a right to input VAT deduction (broadly, taxable
supplies, supplies that would be taxable if made in the UK, or certain financial
and insurance supplies to non-EC customers); and
(b) they are also used in part for the private purposes of the trader or his
staff, or, exceptionally, for other uses which are wholly outside the purposes
of the taxpayer's enterprise or undertaking.
From that date, where Lennartz accounting is not available, and goods are
used (or to be used) for both economic activities and non-economic business
activities, subject to the transitional provisions outlined below, the VAT
incurred must be apportioned between these different activities on the basis of
use (or intended use). The VAT attributed to the economic activities is input
tax and is recoverable to the extent that the economic activities give rise to
supplies with a right to input VAT deduction. The VAT attributed to the
non-economic business activities is not input tax and cannot be recovered.
Taxpayers with assets subject to existing Lennartz accounting arrangements
Taxpayers for whom Lennartz accounting has, strictly speaking, never been
available would normally be expected to unravel the mechanism and adjust both
any input tax claimed and any output tax accounted for accordingly.
However, HMRC is committed to easing the administrative and financial burden
on taxpayers who have already embarked on, and continue to operate, Lennartz
accounting under HMRC's old policy.
Consequently, where a taxpayer has applied Lennartz accounting on the basis
of HMRC's pre-VNLTO understanding of the law, the taxpayer may opt to continue
using Lennartz accounting in respect of the assets concerned.
Taxpayers exercising this option must honour the full, ongoing commitment to
account for output tax imposed under Lennartz accounting and HMRC will take
action if a taxpayer fails to do so.
Those taxpayers who do not exercise this option must unravel the Lennartz
accounting mechanism by adjusting both their output tax and corresponding input
tax. They should write to their Client Relationship Manager within HMRC or the
HMRC Written Enquiries Section at Alexander House, Victoria Avenue, Southend.
SS99 1BD to discuss and agree a fair way of doing so. HMRC will not accept
one-sided claims for repayment of the output tax only.
Taxpayers who have committed to projects anticipating the availability of
Taxpayers who are not permitted to use Lennartz accounting must apportion VAT
incurred for both economic and non-economic activities on the basis of use and
intended use from the date of this announcement.
However, HMRC will consider claims from taxpayers who have already entered
into binding commitments for projects on the understanding that Lennartz
accounting will be available. Taxpayers should contact HMRC at the addresses
Some taxpayers (following the House of Lords’ judgments in the cases of
Fleming and Condé Nast) have submitted “Fleming” claims for Lennartz treatment
for assets where VAT was incurred in accounting periods ending before 1 May
1997. No decisions on these claims were taken pending the issuing of this
announcement. These claims will now be reviewed and, where appropriate, rejected
if the taxpayer had not taken up the option to use Lennartz accounting at the
time the input tax was incurred (where this was available) and/or where the
VNLTO decision means that the claimants were not entitled to use Lennartz
accounting as there was no EU law right to do so.
For further information please contact the Helpline on 0845 010 9000.
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Article Published/Sorted/Amended on Scopulus 2010-01-23 15:29:20 in Tax Articles