Wellcome Trust – The Scope of Lennartz
The Lennartz mechanism is a VAT mechanism under which VAT incurred on goods used in part for a non business purpose is recovered in full rather than apportioned and then output VAT accounted for on the non business use in the periods following. It was established by an European Court case of the same name concerning a german tax adviser. It was potentially very beneficial to bodies that had non business activities and not surprising HMRC were never very keen on it. This led to lots of argument.
Initially it applied to goods, then following an other ECJ case it was accepted it could also apply to services such as those of constructing a building and HMRC were wrong to attempt to restrict it. Then in a case called VNLTO it was found that it had always been misunderstood and it didn’t apply to all cases of non business use but just private use. This meant that registered businesses engaged in non business activities could not use it but only those engaged in private use. Private use and non business or non economic use could therefore be distinguished.
The VAT tribunal has just released its judgment in the Wellcome Trust case which concerned whether Wellcome was entitled to make a Lennartx claim for VAT incurred between 1991 and 1994. It was a Fleming claim made in the window that closed on March 31st 2009 that allowed claims to be made further back than 4 years.
The Tribunal rejected the claim for a number of reasons. It had not accounted for output tax was one. Another was that its use of the building for its investment activities did not amount to a private purpose but was linked to its economic activities – Lennartz could therefore not apply. Wellcome could be forgiven for thinking thats its investments were akin to a private activity as that is what the European Court has said on a previous occasion.
One point that struck me as rather interesting is that the Court agreed that VNLTO did not as is normally reported, create a simple distinction between private use and other non business use. More accurately it distinguished between business use and ‘the use of goods for purposes other than those of the business if such use is outside the main corporate purpose’. This misreporting is not down to HMRC that accepted in the business brief following VNLTO that Lennartz could apply to ‘other uses which are wholly outside the purposes of the taxpayers enterprise or undertaking’. Perhaps if the case is appealed what this means in practice will be further explored.
The tribunal decision can be found at: Wellcome Case