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HMRC internal manual

VAT Education Manual

Group 6 Item 1 Education, research and vocational training provided by eligible bodies: research

Withdrawal of the exemption for supplies of research between eligible bodies
Transitional arrangements
What is research?
Commercial application
Work that does not qualify as research for VAT purposes
Borderline areas
Ruling by the European Court of Justice
Decision chart to help you establish the liability of research services prior to 1 August 2013
Supplies of research to the European Commission

Withdrawal of the exemption for supplies of research between eligible bodies

The VAT exemption was withdrawn for all supplies of research between eligible bodies relating to contracts entered into from 1 August 2013. The guidance given below relates to supplies made before 1 August 2013 and to those supplies that may be subject to the transitional arrangements.

Transitional arrangements

Supplies of business research where the written contract was entered into before 1 August 2013, whether or not work has started, will continue to be exempt for the life of the contract, provided that the services performed are within the scope of the contract as it stood immediately before 1 August 2013.

If a contract is extended or varied (whether or not the consideration payable is increased) on or after 1 August 2013 then payments for these new or changed supplies will be standard-rated. Supplies relating to the contract as it stood at 31 July 2013 will remain exempt.

Minor variations will not affect the liability of the original contract. These might include one or more of the following:

  • Changing the supplier of a sub-contracted service,
  • Changing the order the contract is performed in,
  • Minor changes to the delivery time of the contract and milestones (less than three months) providing there is no additional consideration.

If a substantial variation is made to a written contract as it stood at 31 July 2013, supplies that relate to the changes will be subject to VAT at the standard arte and changes that remain within the scope of the contract as it stood at 31 July 2013 remain exempt. These may include one or more of the following:

  • Increases the length of the contract (over three months),
  • Payment of additional consideration,
  • Requirement for new or additional tests to be performed,
  • Changes to the product or topic on which research is being carried out.

Supplies under the contract will be a continuous supply of services. Each liability of each supply is individually determined.

  • If the supply made is for a supply wholly under the contract as it was on 31 July 2013, that supply will be exempt from VAT.
  • If a supply is wholly for an extended part of the contract, that supply will be standard-rated.
  • If a supply relates in part for the contract as it stood as at 1 August 2013 and in part from extended parts of the contract, then that whole supply is taxable at the standard rate.

As this is a single supply, there can be no apportionment. Supplies can only be exempt if they fall wholly within the scope of the contract as at 1 August 2013, otherwise they are taxable. Research providers that want to benefit from the exemption should ensure all supplies that are within the scope of the contract as at 31 July 2013 are invoiced or paid on their own and not with any work relating to the extended supplies.

What is research? {#What_is_research}

Research means original investigation undertaken in order to gain knowledge and understanding. A supply is one of research whenever the activities are directed towards increasing areas of knowledge or understanding.

It is the intention at the beginning of a project that will determine whether the supply qualifies as research. If the intention is to progress understanding, the supply is one of research. On the other hand, research means more than simply confirming existing understandings.

Commercial application

The fact that a particular project may have a specific commercial application does not prevent it from being research. Indeed much research funded by the Department of Trade and Industry and by Research Councils, (such as the Particle Physics and Astronomy Research Council), is aimed at developing improved equipment or techniques for use in industry.

Work that does not qualify as research for VAT purposes {#}

The following are examples of work that does not automatically qualify as research:

  • management consultancy and business efficiency advice;
  • collection and recording of statistics, without accompanying collation, analysis and interpretation;
  • market research and opinion polling;
  • writing computer programs; and
  • routine testing and analysis of materials, components and processes.

However, some of these activities will qualify if supplied as an integral part of a research project – for example if a specialised software program needs to be devised before the provider can embark upon the main body of the project.

Borderline areas {#}

In the absence of any legal definition of research, there are bound to be borderline cases where you cannot easily categorise the precise nature of the activity - for example, in distinguishing between research and consultancy.

Although the availability of research funds can be a useful indicator that a project is research, you cannot always rely on this. Therefore, if you examine a contract but find that it does not give a sufficiently clear indication of the activity to enable you to decide whether it is research or consultancy, you should accept the eligible body’s own categorisation, unless there are clear and compelling reasons to do otherwise.

 

Ruling by the European Court of Justice {#}

On 20 June 2002 the European Court of Justice delivered its judgment in a case brought by the European Commission against Germany. In Germany research undertaken by universities is exempted from VAT. The Court ruled that research of this nature, undertaken under contracts for payment, cannot be exempted from VAT.

Decision chart to help you establish the liability of research services prior to 1 August 2013 {#}

The Research Services Flowchart will help you establish the liability of research services.

Alternatively, you may find it easier to follow the flowchart in this tabular form.

Question 1: Is the supply to an overseas body? Yes – Go to Question 2
No – Go to Question 3    
     
  Question* 2:* Where does the supplier belong for VAT purposes? UK – Go to Question 3

Other EC – Go to Question 4

Other overseas - Outside the scope of VAT by virtue of the VAT (Place of Supply of Services) Order 1992. Supplier can recover attributed input tax.    
  Question 3: Is the customer an eligible body? Yes – Exempt. Supplier of research services cannot recover attributed input tax (subject to the de minimis limits)
No – Standard rate of VAT due.  Supplier of research services can recover attributed input tax.    
  Question 4: Is the supply performed for a person in business? (The customer should be able to provide a VAT number or letterhead to prove they are in business.) Yes – Outside the scope of VAT by virtue of the VAT (Place of Supply of Services) Order 1992. Supplier can recover attributed input tax.
No - Standard rate of VAT due.  Supplier of research services can recover attributed input tax.

Supplies of research to the European Commission {#}

See VATEDU95000.