Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN56 VAT: amendment to VAT legislation following recent judgments of the European Court Of Justice

Who is likely to be affected?

1   Any business or other organisation which uses land and buildings or other assets partly for non-business purposes.

General description of the measure

2   This measure has three parts:

(a) It will repeal legislation that was introduced in 2003, and which is now ineffective;

(b) It will allow HM Revenue and Customs to make regulations about how VAT charges on non-business use are calculated. The effect of these regulations will be to shorten the period over which VAT charges on non-business use of land and building are paid; and

(c) It will address a potential loophole in the deemed supply legislation.

Operative date

3   Changes a) and b) will have effect on and after 1 September 2007. Change c) will have effect on and after 21 March 2007 to prevent forestalling attempts.

Current law and proposed amendments

4   Currently organisations which acquire an asset which is to be used partly for the purposes of the business can choose at the outset between:

(a) Allocating the asset only partly to business purposes, apportioning the VAT charges, so as to recover up front only the VAT attributable to the business use made of the goods.

(b) Allocating the asset wholly to business purposes, recovering all the VAT charged up front (subject to the normal partial exemption rules) and accounting for VAT on the non-business use in each VAT return period, calculated by spreading the capital cost of the asset over an "economic life" and multiplying the cost attributed to the VAT return period by the proportion of non-business use in the period, This is also known as 'Lennartz accounting'. Or

(c) Allocating the asset wholly to non-business purposes, recovering none of the VAT charged and not accounting for output VAT when the asset is used or sold.

5   The first part of this measure will repeal legislation that was introduced in 2003 to prevent Lennartz accounting on land and buildings. This follows the decision of the European Court of Justice (ECJ) in Charles & Charles-Tijmens which in effect prevents EU member States from legislating against the use of Lennartz accounting.

6   The second part of this measure will enable the UK to implement the ECJ decision in Wollny and, for land and buildings, to reduce the period over which VAT charges on non-business use are paid. Currently, HMRC's policy is that for land and buildings the maximum period is 20 years. The regulations made under this measure will introduce a 10-year period for land and buildings (in line with the existing VAT Capital Goods Scheme.) In practice, this will mean that 10% of the full cost of the building will be taken into account in calculating non-business use charges each year (paid according to VAT return periods). It will also specify the period for non-business use charges on other assets.

7   The second part of the measure will affect assets where Lennartz accounting has already been applied. Non-business use charges accounting for use of assets after 1 September 2007 will need to be calculated on the new basis. The regulations are likely to provide for transitional relief.

8   The third part of this measure will address a disputed loophole as to whether or not the rules that deem a supply of land or building to arise when an interest is disposed of for no consideration apply where there is (in land law terms) a 'surrender' of an interest in land. This measure will put it beyond doubt that a surrender of an interest in land for no consideration is treated in the same way as the grant of a new interest or an assignment (transfer) of an existing interest to another person.

9   These measures will be introduced in Finance Bill 2007, and the detailed rules for part (b) will be introduced by Order. The Order and guidance on the whole measure will be available for consultation during the summer.

Further advice

10 If you have any questions about this change, please contact the National Advice Service on 0845 010 9000. A Regulatory Impact Assessment for this measure and information about other Budget measures is available on the HM Revenue & Customs website at