HM Revenue and Customs Brief 53/10
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Issued on 31 December 2010
VAT: changes to Lennartz Accounting, the Capital Goods Scheme
and legislation for an Extra Statutory Concession which is to be
Changes to the VAT recovery rules in respect of land,
property, boats (and other vessels) and aircraft were announced in 2010
(see Budget Note 42), along with amendments to the Capital Goods Scheme
(CGS) rules to allow for an adjustment mechanism. These implement the
EU VAT Technical Directive (Council Directive 2009/162/EU). The changes
are made partly by primary law (Finance (No 3) Act 2010 section 19 and
Schedule 8) and partly by secondary law (The VAT (Amendment) (No 4)
Regulations 2010), taking effect from 1 January 2011.
HM Revenue & Customs (HMRC) also announced that
alongside these amendments it would simplify or update the current
rules for the CGS and that it would regularise an existing Extra
Statutory Concession linked to the option to tax and reaffirm an area
of policy that has been the subject of litigation (see Revenue
& Customs Brief 47/10). Legislation relating to recovery of VAT
on directors’ accommodation is also removed.
Draft secondary legislation was published for comment in
November and amended in light of responses. The new law takes effect
from 1 January 2011.
Who needs to read this?
Taxpayers buying land, property, boats (as well as ships or
other vessels) or aircraft on or after 1 January 2011; partly exempt
taxpayers and those with non-business use of assets in the CGS;
taxpayers acquiring CGS assets before they register for VAT;
representative members of VAT groups with CGS assets; taxpayers using
or intending to use Lennartz Accounting.
Under previous arrangements, VAT on land and property, boats
and aircraft was recoverable upfront and in full on both the business
and private use of the asset (subject to any partial exemption
restriction). VAT was then payable over subsequent years in respect of
the private use of the asset. This is known as 'Lennartz' Accounting.
The new legislation, introduced as a result of the new EU VAT law known
as the Technical Directive, ensures that VAT recovery is restricted to
the business use of the asset concerned, excluding any private use by
the taxpayer or the taxpayer’s staff. This VAT restriction does not
affect owners of other types of asset.
The Technical Directive requires all Member States to
introduce an adjustment mechanism to take account of changes in use of
these assets when VAT recovery is restricted. The UK has adapted the
existing CGS to provide for this adjustment mechanism.
HMRC took the opportunity, while making changes in this area,
to take forward the final phase of a three year programme to simplify
the partial exemption rules, on which business has been consulted.
There are therefore a number of other aspects which simplify or update
the rules in this area.
HMRC exposed draft secondary legislation for comment in
Revenue & Customs Brief 47/10. All responses were considered
carefully and, as a result of feedback, an aspect of the proposed
simplification measures which HMRC had expected to be widely welcomed -
legislation to ensure that insignificant CGS adjustments were
disregarded - has now been removed.
There have been other minor changes to the draft legislation
as a result of comments.
The new law
The key changes are outlined below. Guidance on the changes
will be published early in the new year. The new legislation and
explanatory note can be found at Annex A.
From 1 January 2011, taxpayers buying land, property, ships,
boats, other vessels or aircraft will be permitted to claim VAT only to
the extent the asset is used for business purposes, subject to any
partial exemption restriction. However, to help ensure a fair recovery
of VAT if use changes, ships, boats and other vessels and aircraft
costing £50,000 or more will now be included in the CGS.
The scope of the current CGS has been widened so that it not
only caters for changes between taxable and exempt business use (as
now) but also for changes between business and non-business use of
As part of HMRC’s drive to simplify and update the rules in
this area, taxpayers now have the option of seeking approval for a
combined method for dealing with taxable, exempt and non-business
Legislating for a concession
An Extra Statutory Concession, that allows VAT recovery under
a CGS type calculation by a person who was not registered for VAT at
the time a CGS asset was acquired, will be withdrawn from 1 January
2011. Taxpayers who registered for VAT before this date will still be
able to rely on the concession whilst those registering for VAT on or
after it will be able to recover the appropriate VAT under the revised
References to the concession can be found in paragraph 9.4 of
Notice 742A - Opting to Tax Land and Buildings (as well as HMRC VAT
guidance on Land and Property (V1-8) paragraph 22.13.4 and Input Tax
(V1-13) paragraph 6.9).
HMRC has clarified in law that the representative member of a
VAT group is the owner for VAT purposes of all CGS items owned by
companies while they are within the group. The legislation also
clarifies who the owner is where there is a Transfer Of a Going Concern
(TOGC) and other cases where there is a transfer without a VAT supply.
There is no change to HMRC’s policy in these areas and the new
legislation aims only to put the matters beyond doubt.
The secondary legislation and explanatory note can be found
at Annex A. Q&A guidance
on how the rules are applied in practice will be published early in the
new year. Lennartz Accounting
is now available only in very limited circumstances where,
for assets other than land property, ships and aircraft, 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)
- in part for the private purposes of the taxpayer or his
staff or, exceptionally, for other uses which are wholly outside the
purposes of the taxpayer’s enterprise or undertaking
Taxpayers who have embarked upon Lennartz Accounting in
relation to an asset before 1 January 2011 must continue to operate it
in respect of that asset. However, for land and property, ships and
aircraft any VAT incurred on or after this date is recoverable only to
the extent that the asset is used to make taxable supplies or other
business supplies carrying input tax credit.
As a transitional measure, following a change in policy
arising from an ECJ decision, many taxpayers who had incorrectly been
permitted to use Lennartz Accounting were able to continue using this
mechanism, unless they chose to unravel the Lennartz Accounting
completely (see Revenue & Customs Brief 02/10). From 1 January
2011, any VAT incurred on land and property, ships and aircraft is
recoverable only to the extent that the asset is used to make taxable
supplies or other business supplies carrying input tax credit. From 1
July 2011, taxpayers who were incorrectly permitted to use Lennartz
Accounting will be able to unravel only where normal assessing time
limits still apply to the original claim.
HMRC will include more detailed information on the application
of Lennartz Accounting with the guidance to be published early in the
The new law will take effect from 1 January 2011.
Further information can be obtained from the HMRC website or
by contacting the Helpline on Tel 0845 010 9000.
Instruments - 2010 No 3022 Value Added Tax, The Value Added Tax
(Amendment) (No 4) Regulations 2010
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Article Published/Sorted/Amended on Scopulus 2011-01-07 18:48:50 in Tax Articles