Recovering VAT On Assets With Both Business And Private Use

Andrew Needham looks at methods of recovering and accounting for VAT on assets with both business and private use.

A business can recover VAT on goods and services purchased for use in its taxable business activities. VAT on goods that are used for private or non-business purposes cannot be recovered. But what happens when goods have both business and private/non-business use?

Normally, when an asset is purchased that has both private and business use, an apportionment of the input tax is made to reflect the taxable use of the asset, and VAT is recovered accordingly. There is no set method, but HMRC say that the method should be ‘fair and reasonable’. However, there is another route available to businesses, but its use has become increasingly limited because HMRC don’t really like it, as it can allow businesses to recover more VAT and obtain a cashflow advantage.

The ‘Lennartz’ mechanism is a VAT mechanism under which VAT incurred on goods used in part for private purposes is recovered in full rather than apportioned, and then output VAT accounted for on the non-business use in the periods following. Full VAT recovery is permitted as the asset is treated as being entirely for business purposes, so output tax is due on any private use because it is regarded as being a deemed supply of the business asset. This accounting mechanism was established by an ECJ decision of Lennartz v Finanzamt München III ([1995] STC 514), concerning a German tax adviser. 

This method could be used when a business purchases an asset or services resulting in the construction of a new asset, which has mixed business and private use (but generally not mixed business and non-business). A business can apply the mechanism if it buys goods (other than land, buildings and civil engineering works - ships, boats or other vessels and aircraft) that it intends to put to a mixed business and private use. A business can also use the mechanism if it buys services that create the eligible goods. The Lennartz mechanism is not available on the purchase of a car, as there is a block on the recovery of input tax if there is any private use at all. 

This obviously gives a business a cashflow benefit, as all of the input tax is claimed up front. When calculating private use where use is not on a daily basis, the non-business element is calculated as a ratio of the total use in each VAT period, not of the length of that period.

Output tax on private use is due during the economic life of the goods. The economic life of the goods is limited to a maximum of five years. Once the goods have been fully written off, no further output tax is due.

However, the sale of an asset is fully taxable if the input tax on the purchase was recovered in full, even though part of it was then paid as output tax. 

If a business purchases land or buildings, ships, boats or other vessels and aircraft it should apportion the VAT between business and private/non-business use and recover it accordingly. If the land or buildings cost more than £250,000, or if the ship, boat, other vessel or aircraft cost more than £50,000, any change in business/private use has to be adjusted using the capital goods scheme. The adjustment must be done annually, and for ten years with immovable property and five years in all other cases.

Businesses that purchase goods with both business and private use can either apportion the input tax claimed or claim back all the input tax up front and account for output tax on private use.