FP7 and Horizon 2020 - differing treatment
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 from HMRC.
Under FP7 funding, 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.
Under Horizon 2020 funding, the VAT cost should be incorporated into the original bid, and will then be reclaimable from the funder.