Following the ECJ decision in P Charles and TS Charles Tijmens, Customs have now confirmed in Business Brief 15/05 that the changes to the UK law made in 2003 to counter use of "Lennartz" planning were ultra-vires. Customs now accept that businesses that incur VAT on, for example, buildings to be used both for business and non-business purposes can rely on the Sixth Directive and treat the VAT they incur as fully recoverable, "subject to the normal rules", accounting for output tax on the non-business use over the economic lifetime of the asset (20 years at most for land, buildings and civil engineering works and a maximum of 5 years for other assets).

Customs have invited businesses that wish to do so to make retrospective claims, subject to the 3-year cap in relation to purchases made after 9 April 2003 (the date of introduction of what is now accepted to be defective law).  Customs take the view that businesses that did not make a claim before 9 April 2003 chose not to do so at a time when they could have done, and cannot revisit that decision.

What you should do

You should immediately review your position for input tax incurred on the following, and where appropriate submit a claim to HMRC: 

• acquisitions of land;
• construction of new buildings and civil engineering works; and
• major refurbishments or extensions of existing buildings.

Going forward you should also consider the potential cash flow opportunity which this presents in respect of new projects.