Finance: Landmark ruling deems VAT irrecoverable on general research

Charities and universities that receive public funds to carry out research could face a VAT crackdown following a tribunal ruling.

The University of Southampton has lost an appeal against an HM Revenue & Customs ruling that it could not recover VAT on costs incurred on publicly funded research. It must now repay the incorrectly claimed VAT.

HMRC determined that VAT was irrecoverable because such research is a non-business activity. The tribunal backed its stance.

The case revealed that the university received £71m to carry out research last year, £53m of which came from the public sector. It reclaimed a percentage of the VAT costs on public sector grants, but HMRC ruled that it should not recover anything.

This was because it could not derive earned income from intellectual property stemming from the research, hence marking the activity as non-business. VAT can still be recovered on private sector research, however.

Adrian Houstoun, VAT partner with accountants Kingston Smith, said the case could have implications for universities and charities.

"I suspect that Southampton is not the only one not to have considered its VAT position," he said. "HMRC has its radar fixed on other revenue-raising opportunities. Organisations should ensure their affairs are in order."

Problems will arise only if organisations receive public grants for 'general' research, however. They can still charge and recover VAT on research specifically commissioned by a public body.

The University of Southampton, meanwhile, is appealing against the tribunal decision. The case will be heard in November.

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