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VAT recovery on business assets that have private use

 By

SteveAllen

Sadly Steve Allen died in July 2011. His wife Leah would like to thank all those who know Steve and helped contribute to his success. She has recommends Steve's clients and anyone who is interested in this article topic to contact Rob McCann from “The Vat people” on (tel) 0161 477 6600 . Please make reference to Steve Allen.


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Over the past few years there have been a number of changes in the legislation and HMRC policy relating to the recovery of VAT on goods and services with both business and private use.

Lennartz

The most important changes have come in the wake of the ECJ case of Lennartz v Finanzamt Munchen III in 1991. Initially HMRC ignored the decision and maintained its policy that input tax should be apportioned on the purchase of an asset.

In 2003, the ECJ reconfirmed this principle in a case concerned with the construction costs of a building used partly as a private residence. The decision conflicted with legislation that HMRC had just proposed preventing the use of the Lennartz principle for buildings and civil engineering works. HMRC considered the case concerned, but stated that there was a derogation in Article 6(2) of the EU 6th Directive that allowed Member States to withdraw the Lennartz mechanism altogether for certain assets. However, they did make some minor amendments to their legislation, stating “the Lennartz mechanism is not available for land, buildings or civil engineering works (or services related to them such as construction services) where no entitlement for any qualifying input tax arose prior to 9 April 2003”.

In 2005 HMRC grudgingly agreed that the Lennartz mechanism could be extended to land and buildings following the Charles & Charles-Tijmens case which in effect prevents EU Member States from legislating against the use of Lennartz accounting.

In the 2007 Budget it was announced that there would be a number of changes to the use of the Lennartz mechanism.

The measures enable the UK to implement the ECJ decision in Wollny and, for land and buildings, to reduce the period over which VAT charges on non-business use are paid. Currently, HMRC’s policy is that for land and buildings the maximum adjustment period is 20 years. The new regulations will introduce a 10-year adjustment period for land and buildings. In practice, this will mean that 10% of the full cost of the building will be taken into account in calculating non-business use charges each year. It will also specify the period for non-business use charges on other assets.

The second part of the measure will affect assets where Lennartz accounting has already been applied. Non-business use charges accounting for use of assets after the introduction of the new regulations will need to be calculated on the new basis.

On 14 August 2007 HMRC issued Revenue & Customs Brief 56/07 regarding implementation of these measures. The proposed implementation date of 1 September 2007 has now been delayed to 1 November 2007 because HMRC received some very helpful comments on the draft Regulations during consultation and, for once, decided to listen to them.

Home computers

In another change announced on 14 August 2007 HMRC issued Revenue & Customs Brief 55/07 notifying businesses of a change in policy regarding VAT recovery on computers made available by employers to their staff for use at home. The gist of the Brief is that, whilst the Home Computers Initiative remained in place, HMRC effectively disregarded the VAT consequences of any private use but, now that the HCI has come to an end, HMRC will expect employers to identify private use and account for VAT accordingly.

Businesses will only be able to claim full VAT recovery without any requirement to account for VAT on any private use where the provision of a computer is necessary for the employee to carry out the duties of his employment. In these circumstances HMRC’s view is that it is unlikely that any private use will be significant when compared with the business need for providing the computer in the first place.

Where a business cannot demonstrate that it is necessary to provide an employee with a computer in order to carry out the duties of his employment then only a portion of the VAT incurred can be reclaimed. HMRC will accept any method of apportioning the VAT incurred as long as the result fairly and reasonably reflects the extent of business use.

Where a business continues to provide a computer under an existing HCI agreement full VAT recovery can continue until the agreement (normally 3 years) has expired.

Mobile phones

Most employers provide their employees with mobile telephones to enable them to contact them for business reasons. In some cases the employers allow staff to make private calls while other do not.

In all cases the expenditure on the purchase and line rental for mobile phones is seen as being incurred for business purposes and the VAT on this element of the bill can be reclaimed.

If the company has a policy prohibiting private use, then the tax incurred on the calls can also be recovered in full.

If a business allows its employees to make private calls on their mobile phones and no charge is made for this use, then the VAT on the bill should be apportioned using any “fair and reasonable” method. It would be best to get this method agreed in writing by HMRC. Any internal controls on private use of mobile phones or accounting for output VAT should be documented so that HMRC can see that they are being enforced.

If a business charges employees for private use of the phone then it can recover the VAT in full but account for the output tax on the call charges.

Where the phone package allows the business to make a certain quantity of calls for a fixed monthly payment and there is no separate standing charge, then it must apportion the VAT on the total charge for the package if private use is allowed. Similarly, where the contract is for the purchase of the phone and the advance purchase of a set amount of call time for a single charge, the apportionment will also apply to the whole charge.

Staff relocation costs

If a business pays for the relocation of a member of staff it can recover VAT on the relocation costs providing it can be shown there is a genuine business use.

When a business reimburse employees (including a new employee moving home to take up a post) for the following removal expenses they can treat the VAT they are charged as input VAT:

• estate agents’ and solicitors’ fees;

• storage and removal of household and personal effects;

• the provision of maintenance/gardening for an employee’s former home while it is waiting to be sold,

• short term accommodation in hotels; and

• services such as plumbing in washing machines or altering curtains.

If the business pays only a proportion of an expense then only that proportion of the input VAT can be reclaimed.

Providing the expenditure can be linked to the actual relocation the VAT charged can be treated as the employers input VAT. HMRC does not consider that the free supply of these services to the employee gives rise to an output VAT charge, so there is no VAT to pay either.

If, however, the expenditure is not directly linked to the relocation, but forms a part of the ongoing living expenses at the new property then the business cannot recover any VAT charged. So, for example, the provision of new bespoke curtains or carpets for a new house are accepted as normal moving expenses and the VAT can recovered but buying a stereo would not!

When Directors, partners and sole proprietors move home they may have a personal rather than a business purpose. Provided that you can satisfy HMRC that the purpose was business then input VAT can be allowed as for employees. So, if a business moves its factory from Scotland to Kent it can recover the VAT on the moving costs of Directors, partners and sole proprietors, however, if a Director etc moves home 2 miles nearer the factory they may have problems with HMRC if they try and recover the VAT on removal expenses!


About the Author

Steve Allen is the Director of VAT Solutions (UK) Ltd, an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. Both not only are respected tax advisers, but have worked for both Customs & Excise and one of the top four accountancy firms for many years. This mean that their team know both sides of the equation and are truly experts in this field.

The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from their website www.vatsolutions-uk.com.



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Article Published/Sorted/Amended on Scopulus 2007-09-08 15:48:26 in Tax Articles

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