Research & VAT

How does HMRC define Research?

When considering the VAT treatment of research a good starting point is to consider what HMRC defines as research. 

Where a VAT relief is applied to research the service performed will have to meet the HMRC definition of research for the relief to be applicable.

Although there is no legal definition of “research” in VAT law it is generally considered that research means original investigation undertaken in order to enhance knowledge and understanding.

It is the intention of the parties at the beginning of a project that will determine whether the services supplied qualify as research for VAT purposes. If the intention is to advance knowledge and understanding, the supply is one of research.

Research does not include supplies such as merely confirming existing knowledge or understanding, consultancy, business efficiency advice, market research or opinion polling.

In general terms, when determining the VAT treatment of research what are the key building blocks that determine the VAT treatment?

The key is the detailed contractual arrangement but as a general rule of thumb the following influences the Vat treatment of a supply

• What is being provided – as stated above if the work being performed does not meet HMRC’s definition of research it will be a taxable supply.
• Who the grant is from/ who the customer is – there is a general presumption that if the customer is a commercial company then VAT will be applicable.
• Where the customer is based – under general VAT place of supply rules where a customer/grantor is based overseas any supply of services will be outside the scope of VAT.
• Where IP vests – where the IP vests with the customer/ grantor to enable them to obtain some kind of commercial advantage then the assumption is that the supply is subject to VAT.

Research that is outside the scope of VAT

Generally research is outside the scope of VAT when it is funded, either by the public sector or by the charitable sector, for the wider public benefit. This includes research that 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

However, this is only a general rule of thumb and each case must be considered on its own merits.

The main question to ascertain whether the research is outside the scope of VAT is whether the funding is part of the consideration for any specific supply: does the funder receive anything for the consideration that is paid? If not, then service is outside the scope of VAT. 

Therefore, where a government agency commission research which informs its own policy and the agency retains any IP that arises – this would be a taxable supply.

Where the terms of the contract identify that the results of the research will be in the public domain but delayed to allow for patent protection – this is an indicator that the research is commercial in nature and would not be covered by the exemption.

Where IP remains with the University but a cost free grant is licenced to the customer/ grantor to enable them to market products from the result – this again would be an indicator that the research is commercial in nature and would not be covered by the exemption.

Research outside the scope of VAT – Collaborative research

Where the main research contract is deemed to be outside the scope by virtue of the section above, other contracts linked to the provision of the supply may also be outside the scope by virtue of the collaborative research exemption.  For this to apply:-

HM Revenue and Customs (HMRC) would need to be satisfied that the collaborative arrangement is genuine, then it will accept that all research services provided by each of the collaborating 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.

In order to evidence that a project is collaborative and that the funds passing between eligible bodies are not consideration for any supply for VAT purposes, 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.

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

Knowledge Transfer Partnerships or similar

KTP’s are a UK wide programme enabling businesses to improve their competitiveness, productivity and profitability by establishing partnership with an academic institution.  Such activities are part funded by Government Agencies and part funded by the Business partner. The Government Agency funding being exempt from VAT and the Business partner element being subject to VAT at the standard rate.