Lennartz mechanism and VAT accounting
Published 10 March 2022
© Crown copyright 2022
This publication is licensed under the terms of the Open Government Licence v3.0 except where otherwise stated. To view this licence, visit nationalarchives.gov.uk/doc/open-government-licence/version/3 or write to the Information Policy Team, The National Archives, Kew, London TW9 4DU, or email: psi@nationalarchives.gov.uk.
Where we have identified any third party copyright information you will need to obtain permission from the copyright holders concerned.
This publication is available at https://www.gov.uk/government/publications/revenue-and-customs-brief-6-2022-lennartz-mechanism-and-vat-accounting/lennartz-mechanism-and-vat-accounting
1. Purpose of this brief
This brief clarifies HMRC’s understanding of Finance (No 3) Act 2010, Schedule 8, paragraph 4.
This law provides that, in relevant circumstances, businesses who chose to retain the VAT recovered under the rules of the Lennartz mechanism before 22 January 2010, must continue to account for output tax on the non-business use of the asset.
2. Who should read this brief
Businesses who chose to continue to use the Lennartz mechanism if they entered the arrangement before 22 January 2010.
3. Background
The Lennartz mechanism is only available when purchased goods will be used for business and private purposes, and not when they will be used for business and non-business purposes.
Businesses that qualify to use the Lennartz mechanism are entitled to recover the full VAT incurred on the purchase of these goods (subject to any partial exemption restrictions). They can then account for output tax on the private use of the goods.
In the Revenue and Customs Brief February 2010, HMRC announced that from 22 January 2010, the Lennartz mechanism will no longer be available where purchased goods will be used for business and non-business purposes. Any VAT incurred must therefore be apportioned and only VAT relating to business activities can be recovered.
Businesses who were using the Lennartz mechanism when the goods were used for business and non-business purposes were required to:
- unravel the mechanism
- adjust the input tax claimed and output tax accounted for accordingly
To ease the administrative and financial burden on businesses, HMRC allowed them the choice to continue using the Lennartz mechanism under the rules before 22 January 2010.
When a business chose to do this, Finance (No 3) Act 2010 provides that they continue to account for output tax on the non-business use for the economic life of the asset (5 years for all goods and 10 years for most immovable property up to 31 December 2010).
4. Clarification of the law — Finance (No. 3) Act 2010 Schedule 8, paragraph 4
The purpose of the law is to prevent businesses from being unjustly enriched. It does this by making sure output tax is accounted for on the non-business use of that asset throughout its economic life, when input tax was reclaimed on an asset under the Lennartz agreement.
It’s expected that the whole cost of the asset was taken into account when working out the output tax due. This makes sure that the non-business use of the goods is not excessively taxed.
In 2011, there was an increase in the standard rate of VAT from 17.5% to 20%. As a result, the non-business use of some goods may have been excessively taxed.
In this circumstance (based on the principles of the legislation), if the output tax paid equals the input tax originally claimed (the ‘fiscal balance point’) before the end of the economic life of the asset, businesses are not required to continue to account for output tax on the non-business use of the asset.
5. Next steps
Businesses in this category should read details on how to work out the fiscal balance point.
6. Get more information
If you have any questions about this Revenue and Customs Brief, contact VAT: general enquiries.