VAT recovery on business assets that have private use
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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.
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
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
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
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.
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)
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
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
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Article Published/Sorted/Amended on Scopulus 2007-09-08 15:48:26 in Tax Articles