Last week the European Court of Justice found against German universities, where pure academic research had been exempt from VAT.

Accountants fear the ruling will now call into question the VAT status of research centres in the UK.

Grant Thornton VAT partner, Frank Hartley, said: 'The uncertainty and disruption caused by this judgment will be unwelcome in an already threatened and underfunded sector.'

He added: 'This is a VAT-driven tragedy. The research community and their advisers need to work closely with Customs, the Treasury and the funding councils to ensure that Britain's world-class standing in research and innovation is not killed off by technicalities of the VAT system.'

If changes are made in the UK, universities would have to start charging VAT at 17.5% on supplies of research to other eligible bodies. The big winners would be universities doing scientific or engineering research under contracts with government departments.

However, losers may include public sector and not for profit funders as universities would have to charge them VAT, which the funding body could not recover.