Finance Business Systems

Research Support - Costing and Pricing

VAT

Research Proposals and VAT

VAT can be complicated but the following will provide a very basic guide. Should this explanation not be sufficient you can contact Roger Broughton on extension 82378 or email him on Roger.Broughton@uwe.ac.uk. Roger is the University’s VAT specialist and will be able to answer any questions you may have on VAT.

First of all we need to understand the two elements of VAT – VAT is made up of input tax and output tax.

Input Tax

Input tax relates to the tax that UWE incurs on its purchases. So for example, as part of a successful bid UWE is required to purchase an item of equipment. The cost of that item of equipment may be made up of two elements – the price and VAT. VAT on purchases that we make is referred to as input tax. The university can recover the input tax paid on its purchases from one of two sources – either the sponsor or Customs and Excise. I will explain how we decide who to recover input tax from a little later.

Output Tax

Output tax is the element (standard rate is currently 17.5%) that the university adds to the total cost of a proposal. For example the costing of a proposal may look like this:-

Therefore the total cost to the sponsor will be £23,500.  All output taxes that we collect are paid quarterly to Customs and Excise. Customs and Excise can audit our accounts at any time to make sure that the university has applied the correct VAT status to its research proposals – where they assess we have got it wrong we will be charged.

Output VAT is ALWAYS applied to those proposals defined as “Consultancy”. However, where a proposal is defined as research, output tax is only applied to those sponsors deemed NOT to be an “eligible body”. To complete our understanding of VAT we need to now explain what is an “eligible body”

Eligible and Non-eligible Bodies Eligible bodies for VAT purposes are any “not for profit making” entity i.e. another university; FE college; charity; government department; research council etc.

Non-eligible bodies are therefore all other entities i.e. commercial businesses etc.

Now we have explained the relevant terms and their meanings we can determine how we decide from whom we recover our input tax. For research projects sponsored by an “eligible body” the input tax is collected from the sponsor and therefore the VAT incurred on a purchase must be included in the costing to be submitted to the potential sponsor, with no output VAT charged. In all other situations (both research and consultancy) the input tax is collected from Customs and Excise and therefore the VAT incurred on a purchase must NOT be included in the costing to be submitted to the potential sponsor, but output VAT must be charged at the prevailing rate on the total project cost.

A few examples may help clarify:

Example 1

Any UK Consultancy Project (to either an eligible or non-eligible body)

For all consultancy projects the university will receive the input tax from Customs and Excise and therefore VAT should NOT be included in the costings:

We’ll assume the following costs:

Therefore, for costing purposes exclude input tax but include output tax

Example 2

Research Proposal where the sponsor is a research council (eligible body)

When a UK Research Proposal is submitted to an eligible body, the university must recover the input tax from the sponsor, therefore it must be included as part of the costing.

Therefore, for costing purposes include input tax but not output tax

Example 3

Research Proposal where the sponsor is a commercial organisation (non-eligible entity).

When a UK Research Proposal is submitted to an non-eligible body, the university must recover the input tax from the Customs and Excise, therefore it must NOT be included as part of the costing.

Therefore, for costing purposes exclude input tax but include output tax

Example 4

Research or Consultancy Proposal where the sponsor is an EU sponsor or a sponsor from the rest of the world (outside the scope)

.On a research or consultancy project with a non-UK body, regardless of whether the body is eligible or non-eligible, the input tax is recovered from Customs and excise and therefore should NOT be included in the costing.

Therefore, for costing purposes exclude input and output tax.

Please Note:

There has been considerable debate recently regarding the classification of proposals either as research or consultancy. It is important that we get this right – if we don’t the university could loose a considerable sum of money each year. For RAE purposes I recognise that there is a need to identify as much work as possible as research. However the definition of research for VAT purposes is not as flexible and you may encounter a situation where a proposal is deemed research for RAE purposes but consultancy for VAT purposes. It is important that we make the correct judgement in this matter.

So what is the Customs and Excise criteria for determining VAT status – well unfortunately it’s a little vague – there is no strict definition but C & E see research as “original investigation undertaken in order to gain new knowledge and understanding”.

PIs are advised when submitting proposals that they should use the following statement in their application - 'plus VAT if applicable'.

As an aid to staff a lookup table summarising the VAT status of activities (Research, Consultancy and Teaching) by sponsor type can be accessed from the following link - VAT Status Matrix.