When it comes to accounting for costs incurred during R&D, and thus achieving an accurate figure for tax relief, there are few areas more nuanced than the realm of consumables.

Some accountants may decide it is not worth the bother of navigating HM Revenue and Customs (HMRC) guidelines on the matter and thus leave it entirely alone.

However, we feel that innovative companies deserve the full compensation for their hard work and therefore want to clarify this area so that you can better serve your clients.

Wasted and scrapped items

During the course of R&D, it is sometimes necessary to create prototypes or otherwise employee materials that do not make it into the final product.

A key determining factor on whether these materials qualify for relief is their saleability.

If the materials are sold, whether that is part of the final product or through some other business venture, then they will not qualify for relief.

Any materials that are transformed or destroyed to the point where they are not sold, can qualify provided their transformation or destruction was a part of the R&D process.

Prototypes will qualify provided they do not get sold and are instead destroyed or kept for future use.

Water, power, and fuel

We are all likely concerned with the costs of energy and it may be reassuring for your client to know that some energy costs be eligible for relief.

The challenge with this is determining when water, fuel, and power are used as a direct part of the R&D process.

In some instances, this may be straightforward if the R&D is conducted in an environment that has a separate power line or a dedicated allotment of energy resources.

Energy used for training or admin, even if these things are tangentially connected to the R&D, will not qualify.

Where it is not possible to specifically know the exact figure of energy expenditure for R&D, a best estimate may suffice provided it is well researched and substantiated.

Software

Software is explicitly excluded from the definitions of a consumable.

This is due to software lacking the same capacity for irreversible damage or transformation when compared to other consumables.

Even if your client did somehow destroy a piece of software, the ability to revert back to an earlier version likely still exists.

This would not be true for a piece of plastic that shatters as part of testing a prototype which would not be able to return to a useable condition.

In short, if your client has committed resources to an R&D project that they cannot sell or restore, then they may be eligible for relief.

There is a degree of nuance in this area, and seeking professional advice is always advisable to ensure that applications are not rejected.

Understanding this may also help your defence in the event that your client’s claim is flagged by the Mandatory Random Enquiry Process.

Make sure your client is not missing out on eligible expenditure by speaking to our team today.