VAT ruling threatens research funding

UK universities could be forced to charge VAT on research contracts after a ruling last week in the European Court of Justice.

The ECJ ruled that German legislation, which exempts scientific research carried out by universities from VAT charges, did not comply with European Union law.

The ruling applies to research contract funding from not-for-profit organisations such as government departments, the National Health Service and charities, which are currently exempt.

It does not apply to grant income, such as that from the higher education funding councils and research councils.

UK charities, which sponsor contracts worth £485 million a year, could be the big losers because they are not VAT-registered and cannot claim back VAT. This could leave them out of pocket with implications for future research sponsorship.

A spokeswoman for Universities UK said: "Any change to the current exemptions may have major implications on charities' ability to continue to fund the same level of research and on universities' ability to conduct that research."

Government departments and the NHS will not be hit as badly as they are VAT-registered and can reclaim VAT from the Treasury. Indeed, many research-intensive institutions may benefit as they will be able to pass on the additional VAT charges to government.

Business and tax consultancy firm Grant Thornton said that although UK VAT exemption differed from Germany, the judgment was so sweeping that the UK position was likely to be untenable.

Grant Thornton partner Frank Hartley said: "Government policy needs to be subtle and careful, balancing the interest of winners and losers. The risk is that after the first year, the Treasury sees the VAT windfall for some and cuts back the science budget indiscriminately for all, without acknowledging that the impact will not be uniform across the research community."

HM Customs and Excise is consulting organisations, including universities, government departments and charities, on the likely impact of the ECJ ruling.