HM Revenue and Customs (HMRC) have announced changes to the treatment of input VAT that will affect businesses which make exempt as well as taxable supplies.
Under the previous system, a business which purchased an asset used for both exempt and non-exempt supplies could reclaim all of the input VAT when it was purchased (called ‘Lennartz’ VAT accounting, following the leading case on the matter) and then pay output tax relating to the use of the asset during its period of use. The alternative, of claiming the same proportion of the input VAT that applied to the taxable use of the asset, was also allowable.
Modifications were made on 1 November 2007 relating to the period over which output VAT needs to be accounted for when using the Lennartz system.
It has been announced recently that the European Union is to review the whole area of partial exemption for VAT and, in particular, is likely to abolish the availability of Lennartz VAT accounting on the purchase of freehold property.
In a further move designed to increase VAT receipts, HMRC have announced that ‘independent living units’ for the elderly that are built in the curtilege or grounds of a care home do not meet the requirements for zero-rating and their construction will therefore be subject to VAT at the standard rate.
However, following a reverse in the court, HMRC have had to relax the rules on reclaims of VAT paid by mistake in the past.