VAT and research projects
It is extremely important that the VAT treatment of research projects is accurately determined to ensure that the research delivers the best possible value for money for both the sponsor and the University.
In some cases we are obliged to account for VAT on the income received for carrying out the research whilst in other cases the income is classed as a ‘grant’ and grants are always outside the scope of VAT. Due to increased pressures in funding it is more prevalent for grants to be linked to working directly with Industry. Some TSB and ERDF grants require the University to work with industrial partners with the aim of generating future commercial revenues. If this appears to be the case please do contact the Tax section for specific advice as the grant may be outside the scope of VAT but VAT incurred on purchases could still be recoverable from HMRC. In some further cases, for example where we are carrying out research under a sub-contract from another public body such as another UK university, the research income is exempt from VAT.
The main types of research income are listed below with an explanation of the VAT implications for each. For more complex arrangements (for example, where there are multiple funders and/or international collaborators in the research project) please contact the Tax section for specific advice.
Research Council grants
HMRC treat the research funded by grants from public bodies such as Research Councils as being a ‘non-business activity’ as the research is undertaken for the general advancement of human knowledge. Their guidance was published via this Information Sheet, though it is due to be updated: HMRC guidance on Government Funded Grants
For VAT purposes the income is treated as ‘outside the scope of VAT’. VAT on costs is never reclaimable and is always a cost to the project.
We may be able to claim VAT relief/exemption for purchases for medical research.
Charity funded research
Charities may fund research by means of a grant. This is similar to Research Council grants (above) or through a specific research contract under which certain rights such as Intellectual Property Rights (IPR) exploitation remain with the sponsor.
In either case no VAT is chargeable on the income and VAT is NOT reclaimable on the project costs, although as above, VAT relief may be available for certain purchases for medical research.
Research funded by other public bodies
The University also conducts research under contract with Government departments or with NHS bodies such as Sheffield Teaching Hospitals.
Provided the nature of our activity is genuine research (ie the pursuit of new knowledge as distinct from the practical application of existing knowledge to solve problems or conduct tests) then we do not account for VAT on this income and we are not entitled to reclaim VAT on the related project costs. Again, VAT relief may be available for certain purchases for medical research.
Commercial businesses contract with universities to undertake Research and Development projects.
Commercial research will almost invariably represent a ‘taxable supply’ by the University as businesses rarely make ‘grants/donations’ without expecting something in return. The University will therefore account for VAT on the income from UK commercial sponsors of research and will be entitled to reclaim the VAT on the costs of carrying out the research.
With international commercial sponsors of research we don’t actually have to charge the client VAT in most cases but we can still reclaim VAT on the project costs.
EU framework funded research
Under a specific concession, HMRC treat payments from the EU under the Framework 5 and 6 programmes as being payments for a supply of research to the EU Commission (as distinct from ‘grants for no supply’ in the case of other public funded research).
Under this concession from HMRC, the income may be treated as ‘zero-rated’ for VAT purposes which entitles the University to reclaim VAT on related costs.
Note that all other funding from the EU (for example, ESF funded projects, Leonardo, and even Framework 7) are subject to the normal rules as described above (ie they are grants to conduct ‘non-business’ research on which we do not account for VAT and cannot reclaim VAT on associated costs).
Need help or more information?
Who to contact
If you are in any doubt about whether your research income is subject to VAT or whether the VAT is partly or fully reclaimable contact the Tax section for advice and guidance.
Contact Research Finance for guidance on managing research grant accounts.