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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Is it input tax: treating an asset as wholly business

If a business acquires an asset that:

  • is not a capital item; and
  • is going to be used for mixed business and private purposes (whether or not there is any non-business use)

it has the option of treating the asset as wholly business for VAT purposes. As a result the business will be able to recover all of the VAT incurred, including any that relates to planned private use, except for VAT related to non-business use or used to make exempt supplies.

Capital items are:

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

If this option is adopted the business must pay an output tax charge for each VAT return period to reflect any private use in that period. This is known as the Lennartz mechanism. If the Lennartz mechanism is adopted VAT will be due in full if the asset is disposed of as it is a wholly business asset.

Mixed business and non-business use is excluded from Lennartz accounting because of the decision in Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO) (see VIT62520). That decision confirmed that the EU VAT legislation that imposes a charge for changes of use does not apply to increases in non-business or charitable activity where that activity is normally undertaken by the organisation.

Please note that there is no minimum amount of business use before a business can choose to use the Lennartz approach. Even if the use the goods will be put to is overwhelmingly private, the Lennartz approach can be adopted if there is some business purpose with a right to deduct. However, if there is no taxable business use there can be no claim to input tax since the asset is automatically outside the VAT system.

A business cannot argue that paying output tax on private use gives in itself a right to deduct input tax. Details of how Lennartz works are given at VIT25400.