The VAT exemption for research is being withdrawn as the UK has been notified by the EU Commission that it does not comply with EU legislation.

HMRC has now launched a consultation to assess the impact that the withdrawal of the exemption will have and to see whether there are any possible options to mitigate the impact of the withdrawal.

It has asked suppliers of business or non-business research and those that commission it, to submit their thoughts.

The consultation will end on 14 March 2013.

HMRC said that the majority of research currently carried out in the UK is grant-funded and therefore outside the scope of VAT. But most of the remainder is taxable business research and so the amount of exempt research is understood to be very small.

'Should this assumption be correct, the loss of the exemption should not have a significant impact on UK research but we hope responses to this consultation will clarify this one way or another,' an HMRC spokesman said.

The EC has challenged the exemption of business research supplied between eligible bodies and the UK accepts that the exemption is not permitted by the principal VAT directive.

The government says it has accepted the Commission's analysis and has informed the EU body that it plans to withdraw the exemption with effect from 1 August 2013.

HMRC said that the date, which is still subject to agreement with the Commission, had been chosen because it offers a fair balance between allowing suppliers reasonable time to make adjustments and avoiding an unacceptable delay in implementation which would prompt legal action on the part of the Commission.

Additionally, since the date is the start of the academic year, HMRC hope that this will fit neatly into accounting systems.