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UK To Withdraw VAT Research Exemption

By Amanda Banks, Tax-News.com, London

25 December 2012


Britain has agreed that an exemption on Value Added Tax for the business supply of research between eligible bodies such as universities and charities should be withdrawn from the beginning of August 2013.

The decision follows a notification from the European Commission that the exemption does not comply with European legislation, and HM Revenue & Customs has issued a consultation to assess the withdrawal’s impact and to explore options to mitigate its effect.

Currently, any research supplied between two eligible bodies is exempt from VAT, but under the new rules this will no longer apply in the case of sub-contracted research supplied by one eligible body to another, even though the original contractor may be supplying non-business research. Non-business research, which is outside the scope of VAT, is defined as research in the public good that is either block-funded (that is, from a large general government grant) or funded by a grant from a body which does not receive goods or services in return. Usually, there is no exploitable intellectual property that arises.

However, HM Revenue & Customs (HMRC) advises that because the sub-contractor will be able to deduct input tax on making the supply, this may in some cases allow for a lower net price to be charged by the original contractor. Also, an eligible contractor dealing with a commercial client can deduct the extra cost charged by the sub-contractor as directly attributable to their onward supply to the client.

HMRC further explains that although there is no legal definition of 'research' for VAT purposes, it is generally taken to mean "original investigation undertaken in order to gain knowledge and understanding." This intention determines whether services qualify as research for tax purposes, but research does not include "merely confirming existing knowledge or understanding, consultancy, business efficiency advice, market research or opinion polling."

HMRC adds that the amount of research classed as within the scope of VAT but currently exempt "is understood to be very small."

TAGS: tax | European Commission | value added tax (VAT) | United Kingdom | legislation | legislation amendments | services | Europe

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