UK businesses and academic organisations may do less research after after the withdrawal of an exemption of VAT on research, businesses and universities said.
The government withdrew the VAT exemption for the supply of research on 1 August after it was told that the exemption was incompatible with European Union legislation.
HMRC said that the changes to VAT rules for research services will have a negligible impact on businesses and civil society organisations.
It expects to get an additional £50m increase in revenue from the tax by 2017-2018. About 100 to 200 charities and universities are reportedly being affected.
Respondents to the consultation on the proposed change to the VAT rule, recognised that the government had no option other than to withdraw the exemption for supplies of business research between eligible bodies but said that the withdrawal should be managed so as not to impact on existing contracts, according to HMRC.
But many respondents to the consultation, especially universities, expect that the tax changes will cause them problems, according to a summary of responses to the consultation on the tax change released by the Revenue.
Some respondents wanted the changes to be completely deferred until 2014.
“There is a concern that the consequence of an increase in the costs of research will lead to a corresponding reduction in the volume of research activity that can be undertaken within fixed funding,” HMRC said.
Respondents to the consultation included the British Universities Finance Directors Group, PwC, Department of Health, Imperial College London, and Joseph Rowntree Foundation.
HMRC has published a guide on which types of contracts are exempt from VAT and how the transitional arrangements work.
For supplies of business research where the written contract was entered into before 1 August 2013, whether or not work has already commenced, the exemption will continue to apply to services within the scope of the contract.