Posted in: VAT
This occurs where a business buys something, claims the input VAT and then puts that item to a non-business (private) use.
It also occurs where a business registered for VAT deregisters. Any goods held by the business on deregistragion are treated as deemed supplies if those goods had input tax recovered on their purchase.
Types of deemed supplies
This is similar to a deemed supply, but is applied when a business attempts to recover input VAT on an item where the input VAT is irrecoverable.
An example of this is a car dealer who buys cars for sale to the public. He can claim the input VAT back on the purchase of the cars, however, if he takes one out of stock and makes it available for use in his business or for private use, he has just made a self-supply.
To understand this, you first have to realise that input VAT on cars is generally not claimable, however, if it’s a car dealership then the input VAT is claimable provided the car will be used as stock available for sale to the public.
Types of self-supplies
Note, there is only a requirement to apply these rules where input VAT was originally recovered on the cost of the supply. For example, on deregistration you would not apply the rules to a company car, as you would not have been able to claim the input VAT on that when it was purchased.
The deemed supply rules governing private use of a business asset used to be so simple. We only had the option of apportioning the input VAT between business and private use and reclaiming the business element. However, in 1995 thanks to an ECJ ruling that all changed. Here’s the background to that:
Herr Lennartz was a German tax consultant who bought a car and did not claim any input tax as he was not using it in his business at the time (German VAT works differently to UK VAT when it comes to cars). The following year he did start using the car in his business and so claimed an adjustment of some of the input VAT. The German authorities refused and Herr Lennartz appealed.
The ECJ found in favour of Herr Lennartz and declared:
‘A taxable person who uses goods for the purposes of an economic activity has the right… to deduct input tax… however small the proportion of business use.’
The implication of this was that input VAT can now be claimed in full up front and the output VAT relating to private use spread out over the economic life of the asset as the private use occurs.
This can have a significant cash flow advantage and also takes into account the varying use of the asset in a non-business capacity.
HMRC weren’t happy with this ruling but had to apply it. All seemed well until another ECJ ruling in 2009. A Dutch agricultural cooperative, Vereniging Noordelijke Land-en Tuinbouw Organisatie (VNLTO), went to the ECJ seeking clarification on the use of the Lennartz principle.
The ECJ pointed out that use of Lennartz depends on:
‘the application by a taxable person of goods forming part of his business assets for his private use or for that of his staff, or their disposal free of charge or, more generally, their application for purposes other than those of his business’.
The use of the word private here meant the use of the asset had to be completely unconnected with the operations of the business.
Unfortunately, this has had some serious implications for charities, whose activities included both business and non-business use of assets. Up until this point, they had applied the Lennartz principle in the UK to reclaim VAT on assets they used in both a business and non-business capacity (but not a private capacity). The new ruling from the ECJ meant they should not be using the Lennartz principle.
Further changes from 2011 mean Lennartz can no longer be used for the purchase of land and property, ships and aircraft. This was where the Lennartz principle was of real benefit in the past to businesses.
At the end of all this, we can see that if the asset has private use we can use Lennartz, but is it really worth it? If the asset in question has a significant cost attached to it then yes, but it also has an increased administrative burden attached – the calculation each quarter of the business/private use and the associated output VAT.
For low cost items it’s much simpler to use the apportionment method.
Note that the Lennartz principle applies to goods, not services. In general this is the case, but services used to create a new business asset can fall under the Lennartz principle.