By Daniel Hunter

A vital exemption on VAT for the business supply of research between eligible bodies such as universities and charities is set to end this summer after a Government announcement made shortly before Christmas.

Many universities undertake this kind of research and rely heavily on the exemption which will end at the beginning of August 2013. Alongside the announcement, HMRC has issued a consultation to measure the impact on the research bodies for research currently underway.

Head of VAT Services, Ruth Corkin, from accountants and business advisers James Cowper explained: “The background to this is that the EU Commission has decided that research is not covered by the education exemption within EU law, so the UK is out of line in exempting it. Britain was forced to agree the overhaul and the HM Revenue & Customs consultation will assess the withdrawal’s impact and explore options to mitigate its effect.”

Ruth continued: “The main problem appears to be where a university receives research funding in the form of a grant from other bodies such as charities, government bodies, the NHS, etc, but then needs to subcontract part of that research to another university or eligible body.”

“I don’t think HMRC knows how much research falls within the exemption, which is why there is the consultation. In the impact assessment, they state that it is to gauge the extent of the use of the exemption. I have some clients that supply research services to universities and they have been told that that their supplies should be exempt, strongly suggesting that the universities do rely on the exemption, primarily because they are very restricted on the amount of VAT they can claim. If the subcontracted research relates to non-business grant income, universities may find that they can’t reclaim the VAT anyway as it relates to non-business supplies to the ultimate funder.”

The consultation paper is one of the topics under discussion by the VAT Practitioners Group (“VPG”) National Technical Committee later this month due to its importance to the research community. It is likely that a submission to HMRC will be made by the VPG in response to the contents of the document.

Further adding to the challenges suppliers and universities face, a tribunal case decision over the Christmas break in the case of Groundwork Cheshire could also impact on block funding from bodies and research that is currently outside the scope of VAT.

Ruth explained: “The First-Tier Tribunal appeal decision in favour of Groundwork Cheshire does not set a precedent. However, it is worrying that in the two most recent grant funding cases, the Tribunals are erring on the side of taxable supplies, when traditionally the money has been treated as outside the scope of VAT and contracts actually state this. You would think that this would be a fall back for recipients of grant funding, but ultimately the responsibility is on the recipient to determine the VAT treatment of the supply and not the funder.”

The HMRC consultation will run until 14 March 2013 and is aimed at all suppliers of business or non-business research and those that commission research.

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