17 September 2019 - Article
A long heralded change in the VAT treatment of supplies of research services by universities took effect from 1 August 2013. The change is as a result of decisions that the CJEU (European Court of Justice), and the consequent action taken by the European Commission to force the UK to apply an adverse interpretation to the sector. The UK had treated research provided by one ‘eligible body’ to another eligible body as exempt from VAT as a kind of education service. This was not sanctioned by the Principal VAT Directive, and the result is that, from 1 August 2013, all such supplies of services are subject to VAT. Since the recipient of any such service would be unlikely to be able to reclaim the VAT, this represents a significant cost, at least in theory.
There are two points to note in particular, however.
First, HMRC seems to accept that, in practice, the majority of research carried out involving more than one university is in fact ‘collaborative research’, rather than involving a supply by one university to another of an actual research service. Although this cannot be assumed always to be the case, if all of the circumstances show that the universities had come together with a common charitable aim to generate new knowledge for the public benefit, and in the course of that agreement had undertook to share resources in terms of staff, equipment, and money, then it is unlikely that HMRC will view any flow of money or other benefits from one party to the other as payment for a specific service. They have indicated that this is the case where grant money is received by one institution in circumstances where the funder was aware that there was more than one institution involved, and particularly where the other institutions involved were mentioned on the grant application or grant agreement. HMRC have also helpfully indicated that where one party is supplanted by another, and thus the replacement party was not mentioned on the original application for the grant, they will not seek to distinguish that party’s involvement, but are likely to agree that that also is part of a general resource sharing collaborative research arrangement.
The second point is that any contract which does not fall under the collaborative arrangements interpretation, but was entered into prior to 1 August 2013, will be treated as exempt however long it may last. However, significant changes to the same contract would be regarded as in effect new contractual terms, and any charges raised under these new contractual terms would fail to qualify under this transitional relief. HMRC goes into more detail on this point in publications that were issued on 30 July.
Those who are interested in the detail should now refer to Revenue & Customs Brief 21/13 and Information Sheet 11/13 which are available on HMRC’s web site and were issued on 30 July 2013.