HM Revenue & Customs have now published their long-awaited policy on the application of Lennartz following an important judgement of the European Court of Justice last year.  The new policy is likely to cause severe cash flow problems in respect of any construction project or property acquisition.

The Lennartz mechanism allows upfront VAT recovery on buildings that are to be put to both taxable business and non-business use.  A VAT output tax charge is then made by the charity or college over the economic life of the building, which HMRC regard as being 10 years.  The availability of this procedure assists the cashflow position considerably, and indeed, some projects may not be possible without it.

HMRC have announced that, with immediate effect, Lennartz accounting will only be available for business assets put to private use e.g. yachts.  In exceptional circumstances HMRC will allow Lennartz accounting where the asset is put to use ‘wholly outside the purposes of the taxpayer’s business/enterprise’.  This would not include everyday ‘non-business’ use of buildings by charities and colleges as that use in not outside the purposes of their enterprise, which is to provide education or charitable services.

For many charities and colleges that are considering a new construction project or property acquisition this news will come as a major blow.  Going forward, any VAT incurred on the property must be recovered according to the intended use of the building.  Only that proportion related to taxable business use will be recoverable.  As a consequence, the impact of this policy change on charities and colleges will depend greatly on the level of their taxable income.  Those entities with little taxable turnover will suffer severe adverse cashflow consequences on any construction project/property acquisition as a result of this policy change.