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HMRC internal manual

VAT Input Tax

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HM Revenue & Customs
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Is it input tax: the case of Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO)

Article 26(1)(a) of the Principal VAT Directive imposes a charge for changes of use.

The European Court of Justice (CJEU) in the case of Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO) confirmed that this article does not apply to increases in non-business activity where that activity is normally undertaken by the organisation.

Activity normally undertaken by the organisation is known as core activity.

For example, imagine that a charity carries out free welfare activities as part of its normal undertaking. It buys a van which it uses for both its free charitable activities as well as its shops. The shops are in business for VAT purposes.

At the time of acquisition the charity recovers 50% of the VAT incurred on the van on the basis that this represents a suitable apportionment. If in the future the free welfare activities increase such that if the van was bought at that time the charity should only recover 25% of the VAT incurred a charge to represent this change of use should, in principle, apply.

However, in the VNLTO decision the CJEU indicated that Article 26(1)(a) did not impose this charge. As such, the UK law at Schedule 4(5)(4) of the VAT Act 1994, which implements this provision, cannot tax this increased core non-business use of business assets.

The charge still applies where a charity uses the asset for a non-business or charitable activity that is not normally undertaken by the organisation, although HMRC does not think such a situation will be particularly common. It also applies where there is private use.

Activity that is not normally undertaken by the organisation is known as non-core activity.

All changes in use will be carried out through the Capital Goods Scheme (CGS) if the asset in question is a capital item for VAT purposes. SeePE Partial Exemption for more about the CGS.

Capital items for VAT purposes are:

  • 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.

Please note that the situation is different for services. This is because the UK has relied on EU legislation that allows a more general input tax adjustment for the UK law which imposes a change of use charge.

See VIT62520 for more about the VNLTO case.