What are Consumables and How Do I Claim for Them?
Research and development (R&D) tax credits are one of the government’s more generous schemes for supporting innovation in the UK. Designed to stimulate innovation spending, R&D tax credits offer companies engaging in R&D activities up to 33% back on eligible expenditure.
However, it can be tricky to split up your R&D costs into neat, qualifying groups. There are exceptions and regulations on every category of eligible expenditure and it can be costly to make a mistake when making your claim, as it can prompt HMRC to open an enquiry or even a full audit.
What are the eligible costs?
In general, there are five categories for which you can claim R&D tax credits:
- Staff costs (salaries, NIC and pension contributions…)
- Externally provided staff (subcontractors, agency staff…)
- Software costs
- Clinical trial volunteers
- Consumable items
Although each of these categories has its own rules to be checked, the legislation surrounding consumable items has changed and the confusion which often surrounds the category should be investigated further.
What are consumables?
Consumable items are items that are directly employed, consumed or transformed in the R&D process. They must be consumed in any activity that is considered R&D for tax purposes, which includes ‘qualifying indirect activities’. This definition applies to both the SME scheme and the RDEC scheme, for small and large companies.
Most often, ‘consumable items’ refers to utilities (fuel, water, power) and materials directly used in the R&D process. Chemicals and other substances used in the process can be counted, even if they are later recycled to be used again.
These costs tend to be the smaller proportion of a claim, however keeping good records of them can quickly build into a substantial portion of the costs being claimed. HMRC understands that with many of these examples, like power and water, it can be hard to split bills between R&D and non-R&D costs, so they will accept reasonable estimates based on the requirements of the R&D.
Fixed assets do not fall under the umbrella of consumables, as they have ongoing value to the company. However, capitalising on R&D expenses can open the door to Research and Development Capital Allowances (RDAs).
How will the 2015 Finance Act change affect your claim?
The rules around R&D tax credits and consumable items were updated in 2015 to further clarify the meaning of consumable items and to close a loophole that allowed some companies to be paid twice for their costs.
Previously, companies whose R&D processes were heavy in consumable use could run a R&D trial, sell the items produced and claim the cost of the materials in their R&D tax credit claim, essentially covering the costs of production twice. Seeing as this was not in the spirit of the rules, HMRC has updated the legislation to disallow companies to claim for consumable costs for items sold. This means that if you create a product at the end of the R&D process and then sell it, you cannot claim for the costs associated with making the product sold. For example, a company trialling a new kiln which is more heat resistant could not claim for any consumables used in the R&D process (like propane gas, which is combusted in the kiln and transformed physically into the kiln lining), as they have been sold on and thus, paid for.
Prototypes can still be claimed for, but only if they are used for R&D – if they have a demonstrative purpose, like at a trade show, they are exempt from R&D tax credit expenditure. Furthermore, there are changes to ‘first of class’ production, or expensive items for which prototypes cannot be made, like yachts and skyscrapers; where R&D activities used to be claimable within larger builds as consumables, this rule has also been scrapped.
The best you can hope for is to claim for wastage, as consumable items which are not entirely sold/transferred can still be eligible if apportioned. Furthermore, if your project spans more than one accounting period and the item is only sold later, the periods during which the product had not been sold can include the consumable items used in that period.
What should you do now?
The rules for consumables mostly affect sectors like refineries, manufacturing, aeronautical, shipping and pharmaceutical. If your projects occur in these industries, it’s best to get in touch with a R&D specialist who can confirm exactly how your claim could be affected.
Other fields may be affected less, however they should still take a considered look at their record-keeping. The legislation means you have to ensure that everything is above board or risk an enquiry from HMRC, which could affect the time it takes for you to get your entitlement or even the amount of money you receive.
Comprehensive record-keeping which is detailed and up-to-date will make your life far easier when it comes to going through money spent for your eligible expenses. This is the case if you make your claim yourself, or through a trusted R&D tax advisor.
Using Tax Cloud, you can complete your claim yourself with the guidance of an experienced team of R&D tax specialists who review all your work and can spot anything which doesn’t align with HMRC’s legislation. As part of Myriad Associates, we have over 16 years’ experience with the guidelines in place and can secure and maximise your claim.
To get professional, friendly advice on your R&D tax credit claim, get in touch by calling 0207 7360 4437, or use our contact page.
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