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HMRC internal manual

VAT Education Manual

Supplies of research to the European Commission

European Commission  Research Programmes

For several years the European Commission had a Framework Programme for research and Technological Development, the most recent of which were Frameworks 6 and 7. These have now been superseded by Horizon 2020, which is a European Commission Research and Innovation Programme used to fund research and development within member states. It is more wide ranging than previous initiatives and brings together all existing EU research and innovation funding, including the Framework Programme for Research, the innovation related activities of the Competitiveness and Innovation Framework Programme and the European Institute of Innovation and Technology. 

Framework 6

Under Framework 6 the payments received by research providers were treated as consideration for a supply of research services to the European Commission. However, because of the its status as an international organisation, recognised as such by the public authorities of its host country, Belgium, the supply of those research services to the Commission was exempt under Article 15(10) of the 6th VAT Directive (now Article 151(1)(b) of the Principal VAT Directive).

While the supply of research services was exempt, special rules under Article 17(3)(b) of the 6th VAT Directive entitled the research provider to recover the VAT it incurred that was directly attributable to the exempt supply. 

Framework 7

Payments received by research providers under Framework 7 are grant funds, which are viewed as non-business income and outside the scope of VAT.

Where payments from the Commission under Framework 7 are used solely to fund non-business research activity then any VAT incurred cannot be recovered as input tax. However, where the funding is, in effect, used to subsidise a business activity - that is the research results in something which the research organisation can exploit commercially, VAT can be recovered subject to the normal rules.

Horizon 2020

Funds received by researchers under Horizon 2020 are confirmed to be grants.

Grants in aid paid to fund research does not constitute consideration for any supplies by the person receiving the funding to the person paying it. In these circumstances, research that is wholly grant funded is not a business activity for VAT purposes and is not within the scope of VAT. Any VAT incurred in the course of such funded research is not deductible.

However, where the funding is, in effect, used to subsidise a business activity i.e. the research results in something which the research organisation or its partners can exploit commercially; VAT can be recovered subject to the normal rules.

Partial exemption implications

If you need to consider these implications for a research provider’s non-business / partial exemption position, you can discuss the matter with your local TAPE staff or with the partial exemption Unit of Expertise if necessary.

Other funding of research by the European Commission

This treatment applies only to research funded by the Commission under Framework Research Programmes. You should treat all other funding of research by the Commission on its own merits and on a case-by-case basis.