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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Is it input tax: what is the Lennartz mechanism?



In 1991 the European Court of Justice (CJEU) ruled that taxable persons were entitled to a full and immediate input tax deduction on goods that are to be used:

  • partly for business; and
  • partly for private use

and then had to account for output tax on the private use as it took place. See Lennartz at VIT62520.

Later decisions ruled that the term ‘goods’ included immovable property, in other words land and buildings. This applied whether the input was the purchase of land and/or buildings or the purchase of services of building construction.

Further judgments of the Court and changes to EU legislation made in 2011 have clarified and amended the scope of the Lennartz mechanism. It is now:

  1. only available for goods that are to be put to mixed business and private use, or exceptionally other uses wholly outside the purposes of the taxable person’s enterprise or undertaking, in other words non-core activities. Uses wholly outside the taxable person’s purposes are included within the phrase ‘private use’ for the rest of this part of the manual. This follows the judgment in the VNLTO case (VIT62520). This change was implemented in the UK from 22 January 2010. For more detailed information on this see VIT25280.
  2. not available for immovable property, ships, boats or other vessels and aircraft. This follows changes to UK law which implemented the EU Technical Directive with effect from 1 January 2011.

VIT25550 gives more detail about these changes. It also gives details of the transitional measures for existing Lennartz users and expenditure on goods spanning one of these dates.

What is the Lennartz mechanism and how does it work?

In Lennartz the CJEU confirmed that the business may incorporate goods that are to be used for mixed business and private use wholly within the assets of the business. The result is that the business can have full and immediate deduction of the VAT incurred (subject to any restriction required to reflect exempt use).

The VAT system calls for taxation of the private use as consumption. Therefore the taxpayer must account for VAT on the private use of the business asset in each prescribed accounting period for the economic life of the asset. A prescribed accounting period is often referred to as a VAT return period.

This private use charge arises in EU law under Article 26 of the Principal VAT Directive. It is implemented into UK law in Schedule 4 (5)(4) VAT Act 1994. The private use charge is a deemed supply.

A business does not have to apply the Lennartz mechanism. The alternative is to treat the private use element of the asset as outside the business, and so not claim VAT deduction on this element.

When can the Lennartz mechanism be used?

A business can apply the mechanism if it buys goods (other than immovable property, ships, boats or other vessels and aircraft) that it intends to put to a mixed business and private use. A business can also use it if it buys services that create the eligible goods.

A taxable person cannot use the Lennartz mechanism where the only business use of the goods is making exempt supplies with no right to input tax deduction. HMRC’s view is that EC law requires there to be some deduction of input VAT before a deemed supply can arise in respect of the private use of the goods. If the only use of the goods will be to make exempt supplies and private use, no right to deduct arises. As a result the basic conditions for the deemed supply to arise in respect of private or non-business use have not been met (VAT Act 1994 Schedule 4 paragraph 5(5)).

The Lennartz mechanism cannot be applied to purchases which are subject to input tax restriction in the UK. This includes most cars and items used for business entertainment.

There is no de minimis limit for applying the Lennartz mechanism. A business is entitled to use it in respect of goods which will be used for only a small amount of business use or which are of low value.