A case heard by the ECJ in 2009, Vereniging Noordelijke Land-en Tuinbouw Organisatie v Staatssecretaris van Financien (C-515/07), has shown that up until now, HMRC have allowed a much wider application of ‘Lennartz’ accounting than should be the case under EU law.
HMRC have stated that from 22 January 2010, they will apply the narrower application.
Historically, the accounting method has allowed businesses that buy positive rated assets, and which will be used for ‘business’ and ‘non-business’ purposes, to claim input tax in full at the outset, then pay output tax in any period in which the asset is used for non-business purposes, to reflect the extent of that non-business use.
This clearly creates a cash-flow benefit because normal accounting would require a business : non-business apportionment of the VAT on the asset in the period in which it was bought. This case demonstrated that the UK’s interpretation of ‘business’ was too narrow, meaning that from now on, the availability of Lennartz accounting will be much more restricted. Arguably, the charity sector will be mostly affected by this in that they often buy assets for business and non-business use.
The decision made it clear that even though certain activities are not subject to VAT, it does not necessarily mean they are non-business activities. Revenue & Customs Brief 02/10 (issued 22 January 2010) states the following:
“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.”
So, from 22 January 2010, Lennartz accounting will only be available where the asset in question is used in part for economic activities giving the right to input tax deduction (e.g. used for making taxable supplies), and is also used in part for the private purposes of the business or its staff, or exceptionally for other uses wholly outside the purposes of the business. So, for example, it may be that HMRC now challenge Lennartz accounting used by charities where an asset is used for taxable activities and other activities, solely funded by grants and donations.
Where Lennartz accounting is no longer available, normal accounting must be applied. However, where a business has already applied Lennartz to assets acquired before this decision, it may continue to use it, but if it chooses not to, a fair and reasonable reclaculation is required, i.e. a claim for a refund of output tax paid, less an adjustment of input tax claimed at the outset. Businesses that have entered into binding agreements which include Lennartz accounting must contact HMRC to agree the way forward.
It is recommended that any VAT registered person currently using or planning to use Lennartz should check whether or not it can continue and assess the impact on cash flow.