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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Is it input tax: changes in the use of goods


In this section of the manual ‘goods’ includes any interest in land and buildings even if the supply of such an interest is normally treated as a supply of services.

Where a taxable person has:

  • received taxable supplies of goods (or services giving rise to goods);
  • treated the VAT on these supplies as input tax on the basis that the goods are business assets; and
  • deducted at least some of that input tax even if the deduction is restricted as a result of exempt activities

they may have to account for output tax or make input tax adjustments if the use of the goods subsequently changes.

Where a taxable person treats goods as partly business assets and partly private assets this section of the manual applies only to the business asset proportion.

The private proportion of the asset is treated as having been consumed and put permanently outside the VAT system. VAT on this proportion is not input tax. It cannot be deducted or credited either at the time or by later adjustment.

No output VAT is due on later changes of use of, or sale of, this proportion. This treatment is sometimes called the Armbrecht treatment after the ECJ case that clarified it. See VIT25240.

Permanent removal from business

Goods may be transferred out of a business so they are no longer treated as business assets. If this happens there will be a supply of goods under paragraph 5(1), Schedule 4 of the VAT Act 1994.

The value of the supply is given by paragraph 6, Schedule 6, VAT Act 1994 if the transfer is not by the supply of the goods to someone else for consideration. Normally this is what the business would pay to buy identical, or failing that similar, goods of the same age and condition. Please see V1-12 Valuation.

The exception to this rule is small value business gifts and samples. For more information about this see V1-12 Valuation.

Temporary/partial private use


  • goods are retained as business assets;
  • those goods are temporarily or partly put to private use by anyone, including staff and customers; and
  • no charge is made

that is normally treated as a supply of services. Output VAT will be due.

The charge, commonly called a Lennartz charge, arises when the use happens, with a tax point of the end of the prescribed accounting period. It is based on the VAT bearing cost of providing the goods. It arises under paragraph 5(4), Schedule 4, VAT Act 1994. The value of the supply is given by paragraph 7, Schedule 6, VAT Act 1994 and VAT Regulations 116A to 116N.

Temporary/partial non-business use

The Lennartz charge can also arise if there is temporary non-business use of an asset that is not part of the organisation’s core activities.

However, it does not arise in respect of temporary non-business use that is part of an organisation’s core activities. See VIT25900 for more details on this, including what constitutes core activities.

Non-Lennartz assets

The charge does not arise for ships, aircraft and interests in land or buildings to the extent that the business incurred VAT on the asset or part of the asset after 1 January 2011.

These assets may fall within the Capital Goods Scheme (CGS) if above certain values. See the part of this page of the manual that discusses changes in the use of capital items.

Where VAT was incurred on such an asset both before and after 1 January 2011 it may fall partly within Lennartz accounting (a ‘split asset’ treatment) with any Lennartz charge based on the pre 1 January 2011 VAT-bearing cost.

Please consider the following examples:

  • A business acquires a van that it uses entirely for business purposes. It therefore recovers the VAT in full. After two years the director decides to use the van for private purposes and removes it from the business. A charge arises under Schedule 4 paragraph 5 (1) based on what it would cost the business to buy a two year old van.
  • A business acquires a van that it uses entirely for business purposes. It therefore recovers the VAT in full. The director, a keen angler, uses the van at weekends to go fishing. A charge arises under Schedule 4 paragraph 5(4) each time the van is put to private use. The charge is based on the full cost of making the vehicle available for this use. For details on how to work out this charge see VIT25540.
  • A charity acquires a van that it uses for both business purposes (charity shops) and its charitable work (free nursing services). It uses a business/non-business apportionment method that allows it to recover 50% of the VAT incurred. Over the next two years the number of shops unexpectedly reduces. The same business/non-business apportionment method would now give the charity a recovery rate of 25%. No output VAT charges arises. The input VAT claim is not adjusted since the CGS does not cover vans.

This example underlines the importance of determining at the time the VAT is incurred any intended non-business use of the asset after it has been acquired. So an organisation that has both business activities and non-business activities must consider all expected future uses of an asset at the time it is acquired so that it can properly work out the amount of input tax that can be recovered.

Consider what would have happened if the charity had bought a computer system that it had initially intended to use in the shops (wholly business with full recovery) but later in the organisation as a whole. The initial deduction would have had to have taken this into account and an apportionment of the tax would have been appropriate.

In the example the change of use was not anticipated. Therefore the correct apportionment was applied at the time of acquisition. Thereafter no charge arises in respect of changes of use.

Changes in the use of capital items

VAT incurred on or after 1 January 2011 on the following assets within the Capital Goods Scheme (CGS) may be adjusted for changes in the extent of non-business or private use:

  • interests in land, buildings and civil engineering works where the VAT-bearing capital expenditure in relation to the asset, including acquisition of the asset and/or services of construction, refurbishment, fitting out, alteration and extension is £250,000 or more;
  • ships, boats or other vessels and aircraft where the VAT-bearing capital expenditure on or after 1 January 2011, including acquisition of the asset and /or services of manufacture, refurbishment, fitting out, alteration and extension, is £50,000 or more;
  • computer hardware costing £50,000 or more.

Any change in use, both from business to private/non-business or from private/non-business to business, must be reflected through adjustments to the input tax claimed on the asset under the CGS. For more on the CGS see PE Partial Exemption.

This mechanism is subject to value limits. So if the VAT-bearing costs of the asset (including the services set out above) fall below those limits there is no need to carry out any adjustments to VAT deducted as a result of changes in use.

For the first two categories of capital item the CGS adjustment is the only adjustment required. However, computer hardware may also give rise to Lennartz output tax charges on private use or non-business, non-core activity. For CGS purposes such use counts as taxable business use.

This process does not apply to CGS items where the VAT was incurred before 1 January 2011 (land, buildings and civil engineering works, and computer hardware costing over £50,000). Then the CGS adjustment:

  • is only applied to the input tax claim, not the total VAT incurred;
  • only adjusts for changes between taxable and exempt business use.

Lennartz output tax charges will arise on private use of such assets or any non-business, non-core activity. See VIT25900. Equivalent charges may also arise on non-business core activity use of the asset if the owner:

The charge is in Finance (No.3) Act 2010 Schedule 8, paragraph 4.

For CGS purposes use that gives rise to Lennartz output tax charges counts as taxable business use.

Where VAT was incurred on an asset both before and after 1 January 2011 each part of the cost is treated according to the Lennartz output tax and CGS rules in place when it was incurred (a ‘split asset’ treatment). For example, if a yacht’s purchase price was split so that £40,000 was incurred (in other words VAT became due) before 1 January 2011 and £60,000 in March 2011, then:

  • Lennartz output tax charges for later private use will be based on the £40,000 cost incurred before 1 January 2011. These charges will be worked out at the VAT rate which applies at the time of use, say 20%, even though VAT incurred was charged at 17.5% or 15%.
  • CGS adjustments will be based on the £60,000 costs incurred after 1 January 2011 (VAT incurred £12,000).

Where expenditure is incurred over time on an asset it may be hard to decide whether the expenditure constitutes a single capital item with a single set of CGS adjustments or several capital items for CGS purposes. See PE Partial Exemption for more on this point.

General guidance on the application of a charge to account for any private use of a business asset

In general terms where a business has:

  • fully recovered VAT on goods or services on the understanding that they are to be used wholly for a business purposes; and
  • later changes the use to any private use (by anyone, including staff and customers) or non-core activity (see VIT25900)
  • a charge to account for this use will arise.

The charge that taxes this use is intended to ensure that the taxable person, their staff and others do not achieve an advantage over private individuals. That advantage could happen simply because the taxable person is registered for VAT. They are therefore in a position to recover VAT incurred on costs. The charge will not apply if the taxable person has not recovered any of the VAT on the costs.

The CJEU has addressed the question of whether such a charge should be applied. It is clear from two decisions, Julius Fillibeck Sohne and Danfoss/Astra Zeneca, that the circumstances under which an individual can benefit privately from a business expense without a private use charge arising should be very narrowly defined.

Although both cases concern the private use of services the same principle will apply to goods. These cases indicate the circumstances where it is and is not appropriate to apply a private use charge to a benefit provided by the business.

The two cases introduce separate tests of:

  1. necessity; and
  2. strict business purpose

that should be applied to private use of business expenditure.

The necessity test is discussed in the case of Julius Fillibeck Sohne. The strict business purpose test is discussed in the case of Danfoss/Astra Zeneca. For full details of the cases and the tests see VIT62560.

You will find further guidance on supplies involving business assets in VATSC Supply and consideration VATSC05000

Goods bought in to be given away free of charge

A business might claim input tax on goods that it intends to give away free of charge. Such circumstances may arise where a business purpose is identified, for example an expensive gift for a valued customer. The business may contend that the VAT incurred can be recovered as input tax.

It does not automatically follow that the identification of a business purpose is sufficient to establish a right to recover input tax - see VIT10200. However, this conclusion is academic because the free disposal of the gift immediately triggers a charge under Schedule 4 paragraph 5(1).

This effectively cancels out any recoverable tax. Depending on the precise circumstances it may be proper to recover the input tax and immediately account for output tax on the free disposal. However, it is acceptable to HMRC if the business prefers to neither recover input VAT on the goods nor account for output VAT.

A similar situation arose with the entertainment of overseas customers and further guidance on how to approach this situation can be found at VIT43200.

There are exceptions to the above, namely where you give away low value gifts to business contacts and/or samples. Further information on this can be found at VATSC Supply and consideration VATSC03500

Change of original intention before first use

This section of the manual applies to input tax incurred on or after 1 January 2011 and applies to both goods and services inputs.

There may be circumstances where a business has recovered input tax on goods or services based on intended business use and, before the original intention is fulfilled, the use or intended use changes.

For example a business might incur VAT on either goods or services intended wholly for business use and recover this in full as input tax. However, before the original intention is fulfilled the use or intended use changes. The business now uses or intends to use the goods or services for a private use (by anyone including staff and customers) or for non-business purposes. The business will have to adjust the tax that it has recovered under the clawback provisions in VAT regulation 108.

However, the business will not need to make the adjustment under regulation 108 if the change of use is:

  • of goods; and
  • gives rise to a private use charge under the Lennartz accounting mechanism

as this ensures that all private use is properly accounted for over the economic life of the asset.

However, after 1 January 2011 Lennartz accounting is not available for land and buildings (including building services), yachts and aircraft. Also, it does not apply to changes of use to non-business use which is nonetheless part of an organisation’s core activities (see VIT25900). For more information on Lennartz accounting see VIT25510.

Similarly, if:

  • a business has recovered only some VAT on the basis that the expenses were to be partly used for non-business or private purposes; and
  • before first use this intention changes such that the business now intends to use them wholly to make taxable business supplies

the business will be able to adjust its recovery under the payback provisions in VAT regulation 109.

If the business has not recovered any VAT on the basis that the initial intention was to sue the goods or services for wholly non-business or private use the expense is not a business cost and no input tax can ever be recovered regardless of any subsequent business use. This principle was confirmed by the CJEU’s decision in the case of Waterschap Zeeuws Vlaanderen (see VIT62520).

Clawback/Payback before 1 January 2011

Prior to 1 January 2011 only VAT on business related expenditure (input tax) potentially qualified for adjustment under the clawback/payback rules. In essence it adjusted changes of taxable or exempt use.

With effect from 1 January 2011 all of the VAT potentially qualifies for adjustment, subject to any permanent allocation to private/non-business assets. See PE Partial Exemption.

This was done by a deeming provision, VAT regulation 110(5), which says that use for non-business or private purposes is treated as exempt business use for the purpose of those provisions.