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TaxationWeb by Julie Butler, FCA

Julie Butler, FCA, of Butler & Co, outlines current practice on VAT recovery following a recent European Court decision.

VAT recovery restriction

Until now, where the owner of a stud farm has carried out alterations or extensions to the farmhouse, he/she has had to disallow a proportion of the VAT incurred. The rule of thumb that allows 70 per cent recovery on repairs has been challenged.

ECJ Decisions

Following decisions in the European Court of Justice with the Uudenkaupungin Kaupunki case, Wolfgang Seeling v Finanzampt Starnberg and the unprecedented case Lennartz v Finanzampt Munchen III , Customs once again now have to accept that the alternative approach may be adopted. Aptly named ‘the Lennartz mechanism”, this change in approach comes by references to Article 20 of the Sixth VAT Directive ‘Adjustments of deductions’. This would enable a stud farm owned by a sole trader or partnership to recover all of its VAT at the start.

The stud farm owner would then account for VAT on an ongoing basis by reference to the extent that he/she uses the farmhouse for domestic purposes, rather like the application of the fuel scale charge. The maximum period over which this calculation may be made is 20 years Article 20(2) Sixth VAT Directive. In other words, stud farms can now get Customs to fund more of the initial capital outlay, albeit by way of a 20-year ‘loan’ rather than a grant.

Example

A stud farm carries out a refurbishment of its farmhouse at a net cost of £240,000 and incurs VAT of £42,000. It is estimated that the farmhouse will be used 20 per cent for business and 80 per cent for domestic. The alternative outcomes would be:

Current practice

The stud farm owner can recover VAT of £8,400 (being 20 per cent of £42,000). The owner must immediately fund capital expenditure of £273,600.

New Alternative method

The stud farm owner can recover all VAT of £42,000, leaving him/her with only £240,000 of capital expenditure to fund; an immediate cash saving of £42,000.

VAT accounting

The stud farm owner must then account for VAT on domestic use at the rate of £420 in each of its subsequent quarterly returns over the following 20 years.

The above treatment cannot apply to incorporated stud farms where the house is occupied by a director, irrespective of assumed business use. This is because there is a specific block on the recovery of VAT on accommodation provided for directors.

Julie Butler, FCA
July 2006


Butler & Co, Bowland House, West Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email; j.butler@butler-co.co.uk.

Julie Butler FCA is the author of Tax Planning for Farm and Land Diversification, published by Tottel Publishing. To order a copy click here

Julie is also the author of Equine Tax Planning, published by Tottel Publishing. To order a copy, click here