European ruling tightens up VAT

New HMRC guidance on Lennartz rule affects charities

Charities that acquire assets for non-business use will face a tighter VAT regime as a result of a ruling by the European Court of Justice, according to a statement by HM Revenue & Customs.

HMRC has issued new guidance on the Lennartz rule, which allows a company to reclaim all the VAT paid on a new capital asset that has only a partial business use, and then repay it at a later date.

The guidance says the rule does not apply to organisations - including the majority of charities - that use a particular building predominantly for their primary purpose, even if that purpose is not a business one.

The move could result in organisations having to pay more VAT when they acquire or construct new buildings, said Terry Dockley, VAT director at accountancy firm James Cowper. He said the decision by HMRC was premature.

"The European Court of Justice decision on which this is based lacks clarity," Dockley said.

"And there are other court cases on the subject that have not yet been decided - cases that could alter the situation."

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