VAT exemption on research is repealed

In December last year the HMRC announced that the supply of research by one university/college to another would no longer be exempt from VAT.  This came into force yesterday.  Given the importance universities place on research, this may have a significant impact on the way universities organise and conduct their work.

Why has it been changed?

Following a European Court of Justice case some years ago, which ruled that the equivalent research exemption in Germany was not consistent with European law, the European Commission last year challenged the universities’ exemption for business supplies of research.  The UK government accepted the challenge and is removing the exemption with effect from 1 August 2013.

What does this mean for universities?

Most supplies of research are ‘non-business’ supplies in the sense that they are not provided for consideration.  Such supplies will be unaffected by the change in the law.  HMRC accepts that most research that is grant-funded, either by the government or by a charity, is not provided for consideration and so is outside the scope of VAT altogether.

HMRC will also accept that collaborative research that is grant-funded is outside the scope of VAT, even if only one of the institutions providing the research is party to the contract.  HMRC will need to be persuaded that sums passing between the institutions are not consideration for a business supply of research.  The best way to demonstrate this is for all the institutions collaborating to be named in the funding application.

The sort of funding arrangement that will be affected by the removal of the VAT exemption is research commissioned and funded by a commercial company (which has always been a standard- rated supply), where the university commissioned to do the research sub-contracts part of it to another university. The supply by the second university will also be a standard-rated supply.

These changes came into force on 1 August 2013. However, contracts entered into before that date remain exempt for the term of the contract, subject to conditions.

Oliver Gutman
Partner
Corporate Team
For and on behalf of SGH Martineau LLP
DD: 0207 264 4374
International DD: +44 207 264 4374
E: oliver.gutman@sghmartineau.com
W: www.sghmartineau.com

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