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HMRC refused The Wellcome Trust Limited's claim for repayment of VAT incurred on the purchase of a capital asset in the form of a building and construction services. This decision was appealed and heard by the First-Tier tribunal. The Appellant in this case, Wellcome, is the representative member of a VAT group and is partially exempt with the majority of the supplies made by the organisation relating to a property portfolio, therefore qualifying as VAT exempt supplies and having a limiting effect on input VAT recovery. The organisation undertook substantial alterations to The Wellcome Building providing 6200 feet of additional usable space and incurring costs in the region of £61,000,000 in the process. Wellcome also purchased a second property on which construction works were also undertaken – this building was to be used as a photo library and was to house the organisations finance and investment divisions. It was these costs that Wellcome were aiming to account for under the Lennartz mechanism. The Lennartz mechanism is applicable to goods that are partly used for a business purpose with some personal use and allows full input VAT recovery on the purchase of these goods. Private use is then accounted for as output tax over the goods economic life. In a previous case, it had been ruled that where supplies of construction were provided to a taxable person resulting in the creation of a new business asset, this asset can be brought within the mechanism. The key points raised in this dispute relate to a previous case that was heard in which the Lennartz mechanism was only applicable if the following conditions were satisfied; (a)    The capital assets must have been acquired for business and either private or other non-business purposes;(b)   They must also be allocated wholly to the assets of its business. It was found that Wellcome's use of the buildings relating to the claim as offices of investment management did not constitute private or non-business use of the buildings meaning the Lennartz mechanism could not be applied and the case failed on condition (a) above. The Wellcome Trust Limited's appeal was therefore rejected. As with most property transactions, the costs involved in this case are high and therefore clarifying what costs are recoverable, and by what means, prior to transactions taking place is vital.  This is particularly important for charities and other organisations that are restricted in the amount of VAT that they can recover on expenditure.  Therefore, calling our VAT helpline for a free consultation could prove invaluable to your business.

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