VAT implications for mixed use assets
If you buy an asset solely for use in the business, then you can claim 100% of the VAT on the purchase.
And if you buy an asset purely for private or non-business use, then you can't claim any of the VAT on that purchase.
However if the business buys an asset which will be used both by the business and by you personally, these are known as 'mixed use assets'. So what are the VAT implications for mixed use assets?
Well, there are two main methods for dealing with VAT where there is both business and private use - apportionment and the Lennartz mechanism.
VAT implications for mixed use assets: Apportionment
The usual way to account for VAT on an asset where there is both private and business use, is to apportion the VAT to reflect the relevant usage. So, for example, if you buy an asset for £1,200 (£1,000+VAT) which will be used 80% for business and 20% for personal use, then you only claim 80% of the VAT - in our example £200*80% = £160.
There's no set method for how to apportion the VAT. However HMRC do state that the method should be 'fair and reasonable'.
When you subsequently sell the asset, only the business proportion is subject to tax.
VAT implications for mixed use assets: The Lennartz mechanism
The Lennartz mechanism was established in an ECJ decision in H Lennartz (1995) STC 514) and can be used on any asset purchases other than cars. It can also be applied to services which result in the construction of a new asset.
Using the Lennartz mechanism, VAT is recovered in full rather than being apportioned. Output VAT is then accounted for on the non-business use in the following VAT periods. Output VAT will be accounted for over the economic life of the asset or a maximum of 5 years - whichever is less.
Why is this allowed? Well, all the VAT can be recovered when the asset is purchased as the asset is treated as being solely for business purposes. Output tax is then due on any private use as this is deemed to be a supply of the business asset.
When calculating private use where the asset isn't in daily use, the non-business element is calculated as a ratio of the total use in each VAT period - not of the length of that period.
The Lennartz mechanism: Advantages
HMRC don't like the Lennartz mechanism as it gives the taxpayer a significant cashflow advantage - especially where it's a sizeable asset!
The Lennartz mechanism: Disadvantages
Unlike under the apportionment method, under the Lennartz method the sale of an asset is fully taxable if the input tax on the purchase was claimed in full - even though part of the input tax was subsequently paid as output tax.
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