Business Assets put to private use
Do you use business assets for private or non business purposes (e.g. a yacht/aircraft/computer)? Are you aware that you have a choice as to how the VAT paid on the purchase of such assets is treated?
When you purchase an asset in the course of your taxable business but also intend to put that asset to private/non business use, you have a choice regarding how you treat the VAT paid. You can either: (1) apportion the VAT and recover the percentage of business use (adjusted for any exempt use) or (2) use the “Lennartz” principle which allows full VAT recovery up front, with a subsequent adjustment to output tax to reflect any private/non business use.
The Lennartz principle was established following an ECJ case Lennartz V Finanzamt Munchen III (C-97/90). It can be applied to any asset including land and buildings and to certain services which create new goods (e.g. construction of a yacht). It cannot be applied to any assets where VAT is blocked, e.g. cars/business entertainment or charged under a margin scheme.
The advantage of using Lennartz is the cash flow benefit, but the disadvantage is the need to calculate private use. This is done by calculating the VAT on the “full cost” of making the goods available for private use over the “economic life” of the asset. Prior to 1 November 2007, there was no statutory definition of “economic life”. In practice, it was accepted by HMRC as up to 20 years for land and buildings and five years for all other assets.
However, as a result of perceived “abuse” of the principle, new legislation was introduced on 1 November 2007. This regulation sets out the method of calculation and the length of the economic life. For land/buildings, the economic life has been reduced from 20 to 10 years, for other assets the period remains at 5 years. Transitional rules are available for assets which span the date of the change.
HMRC have published a VAT information sheet 14/2007 which is 17 pages long and not for the “faint hearted”! This information sheet explains the “Lennartz” VAT accounting principle in detail and sets out the recent change in legislation.
Whilst there is an obvious cash flow benefit to using Lennartz, the complex accounting rules may well outweigh any advantage. It may therefore be simpler to apportion the VAT at the outset, unless the VAT is a significant sum and cash flow is an issue for the business.
