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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: Lennartz treatment: sectors and proxies in the education sector

Many businesses adopting Lennartz treatment for property assets will be in the education sector (see PE71100 - Educational establishments), as many such businesses incur large property costs and have significant non-business activities that use those properties. This sub-section of guidance discusses some of the issues that may arise in these circumstances.

It is expected that all PESMs will have at least two sectors: ‘Lennartz’ and ‘General’. General may include other property not subject to the mechanism or there may need to be a third ‘Property’ sector. Further sectorisation of the General sector can be done when necessary and there may be more than one Lennartz sector if the business has elected to treat more than one building under the mechanism. As with all PESMs the overriding considerations must be use, fairness, workable calculations and no cherry picking.

Although the proxy used in calculating output tax may well also be a good proxy for taxable use in the Seeling/Lennartz sector, that sector does not have to use the same mechanism as the calculation of the output tax charge. However whatever proxy is used should be compatible with it and should reflect changes of use over the commercial life of the asset.

The following is a non-exhaustive list of possible proxies for use in PESMs:

Floor Area

As the costs that are being considered are building related, floor area may a suitable proxy. Floor area will work best when the following conditions are met

  • Most of the sector’s VAT bearing costs relate to the building and
  • Most of the floor-area of the building is used for either wholly business or wholly non-business use, with only minor areas relating to both.

Often this will not be the case in colleges, as classes will contain both business and non-business students. Similarly floor area will not be easily applicable to research facilities where labs can be used for both business and non-business research.

It may be possible to use other records or further factors to overcome difficulties in making floor area work. However, as with all PE methods, the more additional calculations and assumptions are needed to make floor area based calculations work, the less likely they are to provide an acceptable result.


These calculations assume that the premises will be a cost component of activities in proportion to the time of use. Where this is not so it will not provide a good answer. If insufficient or unreliable timetabling data is available, then ways of making the calculation work may be needed.

‘Guided Learning’ hours is not acceptable where some of the learning takes place off site and therefore does not make use of the asset, or where the buildings are used for non-teaching purposes as well e.g. conferences and seminars.

Again the more additional calculations and assumptions that are needed to make time based calculations work, the less likely they are to provide an acceptable result.


An income-based method would need to focus on the supplies made from and with the asset in question. Such a proxy would need to include the value of support grant as well as the value of tuition fees, again in respect of the use of the building. If grant funding supports both business and non-business students it will need to be split. This could be by any reasonable calculation, for instance on a head count basis.