Technical briefing

Lennartz appeal fails

Finance | 20 Aug 2010

Socrates Socratous and Linda Skilbeck report on the result of the first UK VAT case since the ECJ’s decision in VNLTO cast doubt on the Lennartz principle.

This case concerned the recovery of VAT in relation to a building used by St Johns College, Oxford, predominately to provide catering to its academic staff.

The staff were entitled to eat in the College free of charge, but guests had to pay for meals (a taxable supply) and the guest bedrooms also generated taxable income.

The College made proposals for a Partial Exemption Special Method to deal with the VAT incurred on the refurbishment.

It argued that the VAT incurred on the building could be attributed to its free supplies of catering to the staff, which constituted ‘non-business use’.

Under the Lennartz principle, it argued that VAT was due on the non-business use, and therefore almost all use of the building was taxable.

The College argued that the VAT incurred could be recovered in full as there was no direct link to any exempt educational activities.

HMRC rejected the proposals. The Tribunal applied the wider definition of ’business’ derived from the VNLTO decision, and concluded that the provision of free meals to staff was a non-economic activity, but that it was for the purpose of the College’s business (‘business’ in this context included the College’s non-economic activities such as publicly funded or endowment funded research).

Therefore Lennartz accounting did not apply, and hence there was no deemed taxable supply to which the College could attribute the VAT on the refurbishment.

The Tribunal ruled that the recovery proposals made by the College were not fair, and the case was adjourned for the parties to seek to resolve the matter. 

This decision endorses HMRC’s policy following VNLTO as set out in Revenue & Customs Brief 02/10 and shows that the determination of business and non-business has become even more complicated for the educational and charitable sector. 

In terms of the application of Lennartz, some readers will recall that the Whitechapel Art Gallery was successful in the VAT and Duties Tribunal with its appeal against HMRCs decision not to allow Lennartz accounting for major refurbishments.

HMRC appealed this decision to the High Court before the VNLTO decision. In light of this decision and other factors specific to Whitechapel, this decision will not now be heard in the High Court and therefore any charities who may have ongoing Lennartz disputes (in particular retrospective ‘Conde Nast’ type claims) with HMRC will need to consider whether to proceed with their own appeals process. 

Socrates Socratous is director and Linda Skilbeck is senior manager at SOC VAT Consultants 

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