28-04-2007

Organisations such as further education colleges and charities have for some time been able to benefit from the use of what is referred to as the “Lennartz mechanism” in respect of certain capital assets.

The Lennartz mechanism allows a VAT registered body that incurs VAT on certain capital projects which will be used for both non-business and taxable activities, to recover all the VAT while the project is in progress (with an appropriate restriction for proposed exempt use).

Non-business use covers, for example, the provision of education to those who are not required to pay fees (e.g. 16 to 19 year olds) and some activities undertaken by charities where no charge is made to the user.

The mechanism can be used for a range of capital projects, including new buildings, extensions and major refurbishments.

Once the asset is brought into use, the VAT on the non-business use is then repaid to HM Revenue & Customs (HMRC) over a period of time. This payback period was originally 20 years, but HMRC has recently announced that the payback period will be reduced to 10 years, with transitional arrangements for projects where Lennartz treatment has already been agreed.

Although this change (which will come into effect in September 2007) will reduce the cashflow benefit of Lennartz accounting, it still offers an opportunity for VAT savings and should be considered when projects are being planned. An early decision on the use of the Lennartz mechanism is essential.

VAT Liaison has had considerable success in agreeing VAT savings for our clients in many different ways and we would be happy to discuss your upcoming projects to see how we can help.

If you would like to discuss this issue or see how we can help, please contact your usual VAT Liaison contact or call our VAT Helpline on 0800 700 652.