17 April 2026
3 min read
VAT is often treated as a non-issue in R&D tax claims, as it is typically excluded from eligible costs. However, for VAT-exempt businesses, the position can be different. In this piece, we look at when VAT can be included, why it matters, and how it can significantly increase qualifying expenditure in certain cases.
By James Allen, ABGi UK Technical Writing Consultant
The CIRD guidance that underpins the R&D Tax Relief scheme states that in most cases VAT cannot be claimed as eligible cost.
It is with good reason why this is the case. Otherwise, double relief, whereby the same costs are claimed within an R&D claim and then also recovered via a VAT return would be possible.
There are, however, exceptions to this rule. VAT-exempt businesses are permitted to claim the full expenditure inclusive of VAT, provided it still meets the eligibility criteria. Education and healthcare, as well as charitable fundraising and financial services are often classified as VAT-exempt.
Innovative businesses are not typically associated with such activities, but this is not always the case, especially within the finance industry. It is certainly worth dedicating time to assessing the VAT status of fintech or insurance-based clients.
A recent case within ABGi’s UK client base proves the point: During financial discussions with one multi-national client, it was established that they were exempt from VAT and therefore the costs were not recoverable so could be included within the claim. Across consumable, software and contractor costs, this amounted to several hundred thousand pounds in additional eligible expenditure.
HMRC does provide guidance on research and development in relation to VAT-exempt (or partially exempt) businesses but, applying to only a few, it is rare and generally not a matter likely to be considered on a regular basis.
If you have any further questions, please contact ABGi to speak to an experienced representative ready to aide your enquiry.