What consumables can be claimed under R&D tax relief?
When it comes to research and development (R&D), expenditure on consumables is one area where qualifying claims can be made. But what exactly are consumables and how do you know if they’re eligible for R&D tax relief?
Essentially, R&D consumables are simply items that have been used up or otherwise transformed in the course of the R&D activities. They need to have been consumed in the actual undertaking of the qualifying R&D work, rendering them no longer usable in their original form once the R&D process has finished.
Examples of R&D Consumables Expenditure
There are many different consumables that typically make up an R&D claim, but as a guide the common ones are:
- Chemicals, fuel or other substances which are used up in an R&D activity (even if they are then recycled to be used again - HMRC will still allow them)
- Components and materials that were used in creating R&D prototypes (note though that these costs cannot be counted if the prototype is later sold on to a customer)
- Electricity, gas and water. Generally companies will pay for these on either a quarterly or a monthly basis and their utility providers will bill them, meaning a suitable proportion can be claimed.
Even though consumables usually make up only a small proportion of an R&D claim, it’s still worth identifying them as they can certainly add up. Although in many cases accurately quantifying things like gas and water usage will be near impossible, you can still make some assumptions and claim for a reasonable apportionment. As long as you play fair, HMRC are unlikely to come back to you on it.
What about fixed assets?
Fixed assets are generally not classed as R&D consumables as they have an ongoing value to the company. However even items that are not capitalised (perhaps because they have a useful life of under 2 years) would not be eligible if they are not used up in the R&D project.
What happened in 2015?
In 2015 the rules around R&D Tax Credits in relation to consumables were updated with a view to offering further legislative clarity. The update also makes things a little fairer and closes some loopholes.
In years gone by, it used to be the case that a company could embark upon an R&D project that was heavy in consumable use, for example a big manufacturing trial, then put in a claim for R&D Tax Credit for the entire cost of materials before selling on the items they produced. This meant that in essence they were receiving double the pay for one piece of work. The legislation used to permit this, but HMRC indicated that the spirit of the rules was being violated. In both 2010 and 2015, new guidance was published that went some way towards halting the practice, although with notably limited success.
What does this mean in the real world?
Let’s think about high volume manufacturing. If a company sells the output of an R&D project, it cannot include the consumable cost of this input in its tax relief claim. The best it can hope for is to include the consumables that could be classed as wastage.
Then there are prototypes. These still can be claimed for, however, their purpose must be strictly in regard to R&D only. So, if a prototype is built for demonstrating a model or for use as a trade show exhibit, it is now excluded from the R&D Tax Credit claim.
Then lastly there’s ‘first of class’ production. This is in relation to high ticket items that would be virtually impossible to produce as prototypes - things like superyachts, skyscrapers etc. It recognises that these projects will contain a mixture of existing knowledge, new ideas and advanced technology. Previously, the legislation allowed individual R&D activities within the larger builds to be classed as consumables, however this has now been stopped so R&D Tax Credit must be claimed via other means.
What is the impact of the 2015 rules on consumables?
As 2015 was only a few years ago, we’re still waiting to see what the effects will be long term. However, what is clear is that the changes have had major impacts on some sectors as they have taken away one of the largest parts of some R&D claims. This is particularly the case in construction, engineering and manufacturing for instance.
The 2015 legislation has also made it a much more laborious job when it comes to identifying consumables. Companies now have to potentially hand-sift through data in order to guarantee they have complied with the rules.
However, there are two things that give this cloud its silver lining. The first is that there’s far less of a grey area when it comes to consumables and whether or not something is eligible. Where this used to be a real headache for companies, tax advisors and HMRC alike, things are now much clearer. Secondly, although these changes seem more restrictive, they were actually delivered alongside more generous payments across the board. This means that most companies claiming R&D tax relief will see a net gain (albeit a modest one) as long they are not affected by the new consumables rules.
What should companies bear in mind if they are looking to claim considerable consumable costs under the R&D Tax Credit scheme?
Records, records, records. Detailed and up-to-date – what was spent, where, when and how much. By keeping accurate records from the outset, making a claim for R&D tax relief is so much easier and less draining. This is particularly the case if you choose to use the services of R&D tax experts such as ourselves. For example, at some stages in the R&D process companies are likely to buy materials in smaller quantities, which can make them more expensive. But if your records are detailed enough to ring-fence these steeper costs, then they can come under a claim for R&D Tax Credits regardless of whether partial or full consumables are eligible.
Looking to find out what your R&D Tax Credit claim could be worth?
Tax Cloud UK is part of Myriad Associates, an expert team of experienced R&D tax consultants. We will be pleased to answer any questions you may have, allay any fears and work with you to facilitate your R&D Tax Credit application to give you the best chance of a success and maximising your claim.
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