If your R&D involves burning through materials, water, fuel or power to build and test prototypes, some of that spend almost certainly belongs in your R&D tax credit claim. But consumables are also one of the categories most likely to be claimed incorrectly, because the rule that excludes them isn't really about whether the item was used in R&D; it's about what happens afterwards.
This article sets out what counts as a consumable item under HMRC's guidance, when the cost stops qualifying because the item ends up in something you sell, and how to apportion consumables that are only partly used for R&D.
What is a consumable item?
HMRC's guidance covers revenue expenditure (day-to-day spend, as opposed to capital costs) on consumable or transformable items used directly in your R&D. In practice, that means:
- Materials and components consumed, destroyed, or transformed during testing and experimentation
- Water used in R&D processes
- Fuel of any kind
- Power, including electricity and gas, consumed directly in carrying out R&D
One exclusion is worth flagging early. Software doesn't count as a consumable item, even though it's central to plenty of R&D projects. That's not a problem in practice. Software sits in its own qualifying cost category, alongside data licences and cloud computing, so nothing is lost. It's simply claimed under a different heading.
How to apportion consumables used partly for R&D
The same rule that applies to every other cost category applies here: the expenditure has to be directly tied to R&D, not to the business more generally. Where a consumable is used partly for R&D and partly for something else, HMRC expects "an appropriate apportionment of the expenditure" to be made.
For example, a company developing a software solution with qualifying R&D has an office space housing all staff. The company pays for power and other utilities for its usage and a portion of these costs will be eligible for relief, as they support R&D. The company needs to establish how much of their utilities was used within the R&D process versus standard business practices (administration, support activities, sales, day-to-day operations).
You don't need a precise metering system to support this kind of split. HMRC accepts a broad-brush approach, based on something like floor area or staff numbers, and its guidance states plainly that where a company offers a reasonable apportionment basis, HMRC doesn't expect to raise detailed enquiries over it. Keep a record of how you arrived at the split and why it's reasonable, in the same way you'd document any other apportioned R&D cost, and you're on solid ground.
Most companies choose to use the ratio of R&D staff time to total staff time, but companies with more energy-intensive R&D practices may want to investigate other options for apportionment, like tracking machine-hours.
For more details on splitting out costs, check out our article: How to Apportion Costs for R&D Tax Credits
What happens if your R&D produces something you go on to sell?
This is where most consumables claims go wrong. Where a company sells items produced in the course of its R&D activity, the cost of any consumable items that form part of those products is excluded from the claim.
This relates to consumables that are incorporated into sold items or turned into them (including where the consumable has been physically or chemically changed in the process). The logic is straightforward: claiming relief on a material and then selling the product it ended up in would mean getting the benefit of that cost twice.
HMRC's own examples make the rule easy to picture:
A pottery manufacturer develops a new, more heat-resistant kiln lining. Testing it means firing 3 prototype kilns using propane gas. All 3 kilns are then sold. Because the propane became part of the kiln lining in the finished, sold product, its cost isn't allowable.
A soft drinks producer is developing new piping to carry water through its production line. Water is passed through the test piping under different pressures and temperatures, then carbonated, flavoured, bottled and sold as normal. Because that water ends up in the soft drink that's sold, its cost isn't allowable either, even though the R&D was about the piping, not the drink itself.
Even if the consumable is critical to the R&D carried out, you can’t claim for anything that you have already received payment for.
Why timing matters for items you eventually sell
HMRC treats this on a period-by-period basis. Costs already claimed in an earlier period aren't clawed back retrospectively. It's the expenditure incurred once the item has actually been sold that falls out of the claim, not the whole project.
This is best demonstrated through the kiln example.
In year 1, the company keeps the test kiln for further development and claims the cost of the propane used to fire it. No sale has happened yet, so the cost qualifies. In year 2, the company carries out further R&D on the same kiln and then sells it. The propane used in year 2 doesn't qualify, because that kiln has now been sold.
Are there any exceptions to the sold-items exclusion?
The exclusion for sold items only applies where the sale of the item happens in the ordinary course of your business. HMRC’s guidance sets out several situations where the sale of the item is not considered ordinary:
- The item is an inevitable by-product of the R&D
- The item is an unintended consequence of the R&D
- A fortuitous sale of an item you don't normally sell
- A sale where the price doesn't cover the cost of the consumables incorporated into it
Waste is treated differently again. Transfers of waste material are never treated as an ordinary business transaction, whether or not you're paid for it.
In practice, this carve-out matters most for R&D that produces scrap, offcuts, or by-products nobody in the business normally sells. If that's your situation and a buyer happens to take the output off your hands, the consumable costs behind it can still qualify in full.
Key takeaways
- Materials, water, fuel and power used directly in R&D generally qualify, provided the expenditure is revenue in nature and tied to the R&D itself.
- Mixed-use consumables need a reasonable apportionment, with HMRC accepting broad-brush methods like floor area or staff numbers.
- If a consumable ends up incorporated into something you sell, its cost isn't allowable, whether it's become part of the finished product or been physically or chemically transformed into it.
- Timing matters. Costs incurred in a period before an item is sold can still qualify.
- Not every sale counts against you. By-products, unintended outputs, fortuitous sales, and below-cost sales that fall outside your ordinary course of business don't trigger the exclusion.
Getting the consumables category right often comes down to understanding what your R&D actually produces, and what happens to it afterwards, rather than just what it costs to run the process. If you'd like help working through which of your material, water, fuel or power costs belong in your claim, get in touch with the Tax Cloud team and we'll walk through what applies to your business.
