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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Other Partial Exemption issues: Lennartz treatment: backdating of PESMs

The choice as to whether to adopt the Lennartz treatment is entirely a matter for the taxpayer and must, except in exceptional circumstances be made when the costs are incurred. HMRC’s incorrect rulings prior to Seeling and ultra vires law prior to Charles and Charles-Tijmens both constituted exceptional circumstances such that retrospective adoptions are allowed within the terms of the Business Briefs.

HMRC will consider retrospective changes to an existing PESM where the trader has retrospectively adopted Lennartz treatment for the VAT incurred on the asset. As stated above, retrospective approval is only given in exceptional circumstances. It is accepted that where a business has taken up its option to retrospectively adopt Lennartz, this will constitute exceptional circumstances in respect of tax years affected by the adoption such that retrospective approvals are possible if all other conditions are met. However, if the asset has not been fully brought into the business, HMRC do not consider that exceptional circumstances exist and therefore approval to retrospectively change the method should not be given.

The difficulty lies in the fact that a taxpayer will often want to start negotiating a new PESM before they have made a firm decision to bring the asset wholly into the business. A new PESM should not be agreed until the Lennartz adoption is made. We are not required to conduct negotiations over methods on a ‘what if’ basis. So before negotiations regarding a new method begin, the taxpayer must make a firm decision to bring the asset wholly into the business and confirm this, preferably in writing. Without this firm decision having been taken, negotiations should not be entered into that involve the use of a Lennartz asset.