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HM Revenue and Customs Brief 53/10


HM Revenue and Customs -Tax Authorities

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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to Lennartz Accounting, the Capital Goods Scheme and legislation for an Extra Statutory Concession which is to be withdrawn


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 assets.

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 activities.

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 CGS legislation.

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).

Policy clarification

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

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 new year.


The new law will take effect from 1 January 2011.

Further information

Further information can be obtained from the HMRC website or by contacting the Helpline on Tel 0845 010 9000.

Annex A

Statutory 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

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