Where a business acquires an asset intended for both business and non-business use, it has a choice as to how the asset is treated for VAT purposes. It may treat the asset as:
- Wholly for non-business/private purposes – VAT will not be recoverable;
- Partly for business use – VAT will only be recoverable to the extent it is used for business purposes; and
- Wholly for business purposes – VAT will be recoverable in full upfront, but subsequent adjustments must be made for any non-business/private use. This is the “Lennartz” approach.
New rules for determining how the VAT on non-business use under the Lennartz approach should be accounted for, are effective from 1 November 2007. The “Lennartz” accounting rules are highly complex: the changes primarily affect land and buildings, but also apply to other assets such as yachts.
The new rules specify that economic life for land and buildings, over which the VAT on non-business use should be accounted for, is now a maximum of 10 years, reduced from a previous maximum of 20 years, significantly reducing the cashflow benefit previously available.
Businesses which owned land and buildings before 1 November 2007, in respect of which adjustments for non-business use have been made, will need to consider the (less than straightforward) transitional rules and recalculate the non-business use charge for the remainder of the economic life of the asset.
Further reform may be on the way. The European Commission has published a proposal to remove the Lennartz mechanism entirely for VAT on immovable property costs. If enacted, this proposal would mean that only the business use proportion of the VAT incurred on acquiring a mixed-use asset would be recoverable on acquisition, with subsequent adjustments being made through the capital goods scheme.
Act now to ensure your business accounts for VAT correctly and benefits from any cashflow advantage available to it, before it’s too late. It is essential that you seek appropriate professional advice with regard to new and existing assets.
If you need further information, please contact Vaughn Chown using the online form below.