Is research that’s funded by grant income subject to VAT?

The VAT treatment of grant income received to fund research depends on whether the institution provides a benefit to the funder of the research. There are two possible cases:

• The educational institution is required to provide a return.

The return can be deliverables, intellectual property, or other products of the research. These supplies are taxable at 5%.

• The educational institution is not required to provide a return.

In this case, the funder does not receive anything in return for the funding other than incidental information (such as progress updates, records of expenses, and evidence that the research has been conducted as requested).

This incidental information will not be considered as a supply of services by the educational institution, and the grant income received will be outside the scope of VAT. VAT that is incurred on an out-of-scope supply (and not linked to any taxable supply) cannot be recovered as part of the business’s overhead costs.