Explaining the differences between recoverable, part- and non-recoverable VAT
When VAT is charged on a purchase in the UK, that VAT may be claimed back by the University from HM Revenue and Customs (HMRC) dependent upon what the purchase is to be used for.
If we are able to claim back the VAT from HMRC we describe the VAT as ‘recoverable’, if not it is ‘non-recoverable’. In other cases we may be able to claim back only a proportion of the VAT charged in which case we describe the VAT as ‘part-recoverable’.
The conditions which determine whether VAT is recoverable in whole, in part or not at all, are explained below.
VAT is fully recoverable when the purchase or expense is being used solely for ‘commercial’ activities. In this context, commercial activities would include:
- commercial research contracts (inc. KTP projects)
- consultancy contracts
- testing and analytical services provided to external customers
- any other activities where we charge VAT to the client (check with your Faculty Finance Team or Professional Services Finance Team if you are unsure on this aspect)
- by HMRC concession, European Framework 5 and European Framework 6 contracts
Where VAT is recoverable in full, the VAT is NOT charged to the cost centre or project but is posted to a suspense account ready to be reclaimed from HMRC via a VAT return. Use Tax Code M2 on a purchase order, corporate card or personal expense for recoverable VAT purchases made in the UK.
VAT is entirely non- recoverable when the purchase or expense is being used solely for ‘non-commercial’ activities. In this context, non-commercial activities would include the following:
- teaching activities including academic conferences, short courses and seminars
- non-commercial research including research funded by:
- research councils (MRC, EPSRC, MRC, AHRC, PPARC, etc)
- charity funded research
- health service & local authority funded research
- EU government funded research (other than European Framework 5 and European Framework 6 contracts)
- most UK government funded research (but check with Research Finance or the Tax section if you are unsure)
- in-house research (i.e. ‘unfunded’ research)
Where VAT is entirely non-recoverable, the VAT is charged to the cost centre or project. Use Tax Code M3 on a purchase order, corporate card or personal expense for non-recoverable VAT purchases made in the UK.
Where a purchase or expense cannot be said to be used solely for either commercial or non-commercial activities, the VAT is recoverable in part. Two particular types of expense fall into this category:
- purchases to be used for both commercial and non-commercial activities, for example, a purchase of a piece of equipment which will be used both for carrying out commercial testing of materials for paying clients (‘commercial’ use) and for teaching undergraduate students (‘non-commercial’ use)
- general overhead expenditure, for example, the purchase of a new computer and office equipment for the departmental office
Where VAT is identified as part-recoverable, the VAT is charged in full to the cost centre or project. A small proportion is reclaimed via the University VAT returns and this is fed back into the central University funds. Use Tax Code M4 on a purchase order, corporate card or personal expense for partly recoverable VAT purchases made in the UK.
Need help or more information?
Who to contact
If you need advice or guidance on the VAT codes for purchasing goods and services from UK suppliers then contact the Tax section before making your purchase.