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VAT – Deemed Supplies and Self-Supplies 18th May 2015
Posted in: VAT
Deemed Supplies
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
- Gifts of goods
- Private use of business assets
- Motor fuel provided for private use
- Goods held on deregistration
Self-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
- Construction services
- Motor cars
Accounting rules for VAT on deemed and self-supplies
Deemed supplies:
- Gifts of goods (deemed supply)
Charge output VAT on the replacement cost of the goods gifted away.
Exemptions to this are small gifts costing £50 or less. Also, samples given away are exempt, but they must be true samples such as a small amount of perfume to get an idea of the scent, but not the whole bottle. - Private use of business assets (deemed supply)
Basically have two options:
(a) apportion the input VAT for recovery between business and private use and recover the business use element; or
(b) reclaim the whole of the input VAT and then make an output VAT adjustment in every quarter that there is private use (this is what is known as the Lennartz principle). - Motor fuel provided for business use (deemed supply)
There are four options:
(a) reclaim all the input VAT and then use the fuel scale charges set by HMRC to calculate the appropriate output VAT. Fuel scale charges are dependent of the CO2 emissions of the car.
(b) claim not input VAT at all, then there is no need to pay output VAT on the private use element.
(c) keep very detailed mileage records so that you can prove what fuel is used for business purposes. In this a case, input VAT can be recovered on the business proportion and there is no output VAT charge.
(d) claim all the input VAT back and then charge the employee for the private use fuel and include VAT on the charge to the employee. - Goods held on deregistration (deemed supply)
Charge output VAT on the replacement cost of all the business assets, taking into account their age and condition.
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.
Self-supplies:
- Construction services (self-supply)
The rule applies to the construction of a building or the extension of a building (increasing its footprint by 10%). The construction services must cost more than £100,000 in a year for the rule to apply. The rule states that where this situation applies, businesses must apply output VAT to the open market value of the construction services.This output VAT will also form input VAT, which the business can recover. The purpose of this rule is to stop exempt businesses from using unregistered contractors or their own employees to perform the construction work and thus avoid paying the output VAT. It will have no effect on businesses that are VAT registered and not partially exempt as the VAT out will equal the VAT in. - Motor cars (self-supply)
Where a car dealer takes a car out of stock and makes it available for private use, then output VAT must be charged on the cost of the car (not the selling price).
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.
