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Qualifying costs: A guide to ‘consumable items’

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Author: Tom Mason

When preparing your clients’ R&D tax claims, you’ll need to be ready to collate, review and submit a substantial amount of data – most significantly, expenditure that qualifies for relief.

The regulations around qualifying expenditure are complex, aiming to ensure that businesses benefit from the scheme while not claiming relief on unrelated spending.

This expenditure will fall into a number of categories, with one of the costliest being ‘consumable items’, particularly for projects which require a lot of materials or specialist, high-cost materials.

Understanding consumable items

HMRC accepts claims for ‘revenue expenditure incurred on consumable items’. This definition is key to preparing compliant claims.

It’s crucial that your client understands revenue vs capital expenditure, as capital expenditure is not eligible for R&D tax relief.

Additionally, for R&D tax purposes, consumable items are defined as ‘consumable or transformable’ materials that are used directly in R&D, including qualifying indirect activities.

These items may include:

  • Fuel or electricity
  • Water
  • Chemicals

HMRC purposefully leaves this definition broad to allow valid claims from businesses across a range of sectors, provided the items themselves are used for qualifying R&D activities.

Indirectly consumed items

Items which are consumed indirectly in the course of R&D projects are not classed as qualifying expenditure.

However, it may be possible for your client to claim relief on an appropriate portion of the cost if the item is partially consumed for direct R&D purposes, as introduced by the Finance Act 2015.

For example, electricity used to power a facility that is used for R&D and non-qualifying activities may be included in a claim if your client can make a reasonable estimate as to how much electricity was used directly in R&D.

HMRC urges a ‘practical approach’ wherever possible – meaning your client may calculate electricity used in R&D by floor area or time spent conducting qualifying activities.

You should also note that the Act introduced new regulations around costs incurred on consumables used for products which are sold in the normal course of business.

As an illustration, consider a company that manufactures and sells solar panels. In the first financial year, the company develops a new form of photovoltaic cell which is more efficient at producing energy, but does not sell it. Consumables used in this project would be eligible for relief.

However, if in the next financial year, the company decided to sell these cells, this would be classed as disposals in the normal course of business and not be eligible for relief.

These can be grey areas, so we recommend that you seek advice from an R&D tax specialist if you don’t have in-house expertise. This will help you reduce the risk of an enquiry for your client and ensure each claim is watertight.

We can advise you on preparing claims for R&D tax relief and qualifying expenditure. Contact our team today to discuss your requirements and your clients’ needs.