Has my not-for-profit organisation /charity/ business paid too much VAT using the Lennartz mechanism?
The first question for many reading this will be – what is the Lennartz mechanism? - quickly followed by – did my organisation use it?!
What is the Lennartz mechanism?
This was a route that some organisations took to improve their VAT recovery cash flow position where they incurred VAT on costs of an asset which they knew would have some non-business/private use as well as use for taxable business activities. The mechanism enabled full VAT recovery on the costs but then required the organisation, that had recovered the VAT in full, to effectively “pay back” the VAT relating to the non-business or private use of that asset. It might have been that the asset was bought by a business and there was some known private use to the cost (a building cost perhaps) or it was an asset cost in a not-for-profit organisation/charity with known non-business use attached to it.
The whole approach to the use of this Lennartz mechanism was the subject of challenge in the European Court and as a result HMRC clarified their position in terms of when the Lennartz mechanism could be used – and VAT fully reclaimed on an asset with the associated Output Tax declaration being required - and when it could not be used. This was back in 2011 and as often with VAT changes there was an agreement to enable some existing Lennartz users to continue after 1 January 2011 to use the Lennartz principle but only with the permission of HMRC.
Why is it now important to check if my organisation or clients had applied the Lennartz mechanism in the past?
HMRC have accepted that as a result of the VAT rate increasing from 17.5% to 20% on the 4 January 2011 there is the possibility that those using the Lennartz mechanism may have paid back a greater VAT value than they had originally recovered.
Clearly these adjustments have arisen in the past and it will be important for any organisation that:
- incurred VAT on assets that had a mix of potential uses and
- applied the Lennartz mechanism
to now take the opportunity to establish whether they have a right to claim back any VAT overpaid.
It’s definitely one of those VAT areas of complexity created not just by the passage of time and the availability of accounting records but also by the interaction of these asset costs with the Capital Goods Scheme calculations which apply to expenditure on land, building and civil engineering works or capitalised expenditure on those items which related to their construction, refurbishment, fit out, alteration or extension where the spend on the business use of the asset, which attracted VAT, is over £250,000. The Capital Goods Scheme also includes assets such as ships, boats, aircraft or capital expenditure on such assets where the net value on which VAT was incurred was over £50,000.
Who might be affected?
Anyone who applied the Lennartz mechanism such as a business with private use of an asset or a Not for Profit body or Charity – perhaps a College or University with major building works?
Clock is ticking for any adjustments
The update from HMRC – whilst alerting those affected to this issue – also notes that any VAT recovery adjustment would be subject to the normal four year timescale.
How can Centurion Help?
- We can help you identify if there have been past VAT claims and adjustments in your organisation if you are new in post and not aware of the basis for any original Lennartz adjustments.
- We can establish what relevant VAT has been recovered and what has been paid over to HMRC as a result of the private/non-business use VAT calculation.
- If an overpayment of VAT has arisen we can help make the adjustment to secure the recovery.
Please call or email your usual Centurion VAT contact or use our firstname.lastname@example.org address to get in touch on this issue or call us on 0330 124 7740.
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