VIT25240 - Is it input tax: bringing an asset partly within the business

If a business uses an asset for:

  • business purposes; and
  • private or non-business purposes

then at the time of acquisition it can:

  • bring that part of the asset that is used for business purposes (or that part used for business and non-business purposes where there is also private use) within the assets of the business; and
  • permanently exclude the remaining element (that used for private and/or non-business purposes).

As such the business will then only recover that proportion of the VAT that relates to its taxable business use.

For VAT purposes the asset is treated as if it were effectively two assets; one within the business (the included part) and one outside it (the excluded part). How to treat the excluded part is described at VIT25200.

The included part is treated as a normal business asset. This has the following consequences:

  1. If the business use of the asset increases after acquisition the business cannot recover any extra VAT.
  2. If the business sells the asset VAT is only due on the part included in the business and VAT on sale costs will need to be apportioned.

Imagine that the business use was 60% at the time of acquisition and the business recovered 60% of the VAT incurred. It only needs to account for VAT on 60% of the sale value. The business will be able to treat 60% of the VAT on sale costs as input tax.

If after acquisition the non-business use of the asset increases there is no need to make any adjustments to input tax unless:

  • the asset is a capital item for Capital Goods Scheme purposes (see VIT25260); or
  • there is a change in intended use before any actual use happens.

Note that neither will change the proportion of the asset that is treated as a business asset - that is decided at acquisition.

However, if after acquisition a business increases its private use of the business portion of the asset, a “Lennartz” output tax charge arises to reflect this change (see VIT25280). This does not apply if the asset is a capital item. Capital items are:

  • immovable property (including construction services);
  • ships, boats or other vessels; and
  • aircraft

For capital items input tax is adjusted as for non-business use (see VIT25260).