FP7 and Horizon 2020
This funding should be categorised as non-business income for VAT purposes. This means that no VAT is due on the funding received but we cannot reclaim any of the VAT incurred on the direct costs of the research.
As this VAT cannot be reclaimed from the EU Commission either, this VAT will be a cost to your department and you will need to fund it from other sources.
Withdrawal of concessionary treatment
By concession, HMRC treated EU Framework funding up to and including FP6 as being zero-rated, business income for VAT purposes. In practice this meant that although no VAT was due on the funding received, we were able to reclaim all UK VAT incurred on the direct costs of the research.
HMRC have now withdrawn this concessionary treatment.