Policy paper

Revenue and Customs Brief 10 (2013): withdrawal of the VAT exemption for supplies of research

Published 25 April 2013

Purpose of this brief

The purpose of this brief is to update those engaged in research on developments arising from the consultation and to request further data from some of those who have already responded. The Summary of Responses will be published after this additional data has been provided.

Who should read this brief

All suppliers of business research and those that commission research.

Background

HM Revenue and Customs (HMRC) published the consultation December 2012 to gather information to allow them to assess more accurately the impact of the withdrawal of the exemption and to see whether there are any possible options to mitigate that impact.

The consultation has identified that there is a lack of clarity in the distinction between:

  • supplies of research that are outside the scope of VAT, and
  • those that are exempt business supplies which will be affected by the withdrawal

A number of respondents requested some clearer guidance on these differences.

While HMRC is grateful to the taxpayers that responded to the consultation, because of the difficulty expressed during the consultation that there is a lack of clarity between outside the scope of VAT research and business exempt research, HMRC is providing further guidance below and will be contacting those taxpayers who have already provided data to confirm their figures in light of this guidance.

Collaborative research

HMRC has been made aware that a significant amount of research is collaborative - indeed, this seems common in the case of research council funding. Collaborative research is where several bodies (typically universities or other eligible bodies) get together to apply for grant funding to undertake a research project. It is not uncommon for one of the applicants to be shown as the head or lead body which deals primarily with the funding body including receiving funding which is passed to other applicant bodies for their contribution to the project. For ease, contracts are often concluded only in the name of the funding body and the lead research body even though this is a collaborative project.

HMRC will accept that in such cases of collaborative research, all research services provided by each of the bodies involved in the project are outside the scope of VAT, even if the funding may be passed on by the lead research body to others and that only the lead research body is party to the contract with the funding body.

HMRC may ask for evidence that research bodies are participating in collaborative research; the best evidence of that will be the original application for funding which would, in many cases, show who all the collaborative partners are. However, HMRC will accept any alternative evidence that clearly demonstrates that the bodies concerned were participating in collaborative research.

Changes in collaborative parties

HMRC can confirm that research bodies that are added to or are substituted in a collaborative research project once it has commenced (and so are not mentioned in the funding contract) would still be seen as parties to the collaborative project so that their supplies remain outside the scope of VAT.

Further guidance

Although each individual contract must be considered on its own merits the following is a generic guide to assist in ascertaining the likely liability of the supplies that are made.

For there to be a supply of services for VAT purposes, there must be a direct and immediate link between consideration paid and a service provided. HMRC do not consider this to happen in the case of research which is funded, either by the public sector or by the charitable sector, for the wider public benefit. This was mentioned in the opinion of the Advocate General in Keeping Newcastle Warm (C353/00).

Where a subsidy is granted by the donor to the recipient to enable a third party to obtain a specific service (or to obtain it more cheaply) this would, as a general rule, be a taxable transaction.

The main question to answer is whether the funding is the consideration or part of the consideration for any specific supply. If not, then it is outside the scope of VAT.

Situations where the funding will be outside the scope of VAT include:

  • research which is funded for the ‘general public good’ and there is no direct benefit for the funding body
  • research which is funded for the general public good and is either not expected to generate any intellectual property (IP), or if it does then any reports or findings will be freely available to others
  • where there is a ‘collaborative’ agreement between different research institutions where all parties to the grant are named on the application
  • where the funding flows through one named party - and they act purely as a conduit passing on the funds to others involved in the research project - the funding remains outside the scope of VAT

Where funding is provided to a named party for research that will either generate IP to be exploited by the funder and/or is not for the public good and they subsequently decide to sub-contract some of the research to an eligible body (for example a university), the initial funding to the named party (assuming an eligible body) will be taxable consideration for a supply.

Issued 25 April 2013