By Nigel Holmes, Head of R&D Technical Operations at Catax
In this month’s Tax Talk I am going to explore the definition of “Consumable Items” as a qualifying cost, look at some examples of what does and does not qualify and remind everyone about the change of rules that took place in 2015. The consumable items definition is the same for both the SME and RDEC schemes.
Firstly, the cost must be revenue in nature. By this we mean it is not on an item that would usually be treated as an asset, regardless of where the cost has been accounted for. So, for example, a large piece of machinery or a computer are highly unlikely to be consumable items unless they are being stripped down and used as components for something else, such as the building of a prototype. Capital costs, if treated correctly as fixed assets, can, of course, qualify for Research & Development Capital Allowances (RDAs).
Secondly, the item must be consumed within the R&D activity for which the tax relief claim is being made (including a Qualifying Indirect Activity). Therefore, it is not advisable to take a broad-brush approach to quantify the consumable items figure. Whilst estimates are perfectly acceptable, it is vital some methodology is applied as to how the figure was reached just in case HMRC decide to ask for further evidence.
Water, fuel and power are regarded as consumable items for R&D tax relief purposes.
The item needs to be consumed or transformed in order to qualify. Some cases are clear cut – such as food and drink ingredients, or chemicals. Others are less so. Whilst it could be argued that the components of a prototype could end up back in their original state if the prototype is disassembled, it is highly unlikely that HMRC would take that point as the component parts will have suffered wear and tear and, therefore, could be regarded as transformed to a degree.
The rules for consumable items changed with effect 1 April 2015. From that date, items consumed that were sold on or transferred in the normal course of the company’s trade could not be included in a claim. This prevents the sale of ‘first in class prototypes’ to customers. However, any items sold as waste or any by-product of the R&D that is sold on that could be regarded as not part of the company’s normal trading activities can be included in a claim.
So as with much of the R&D tax relief legislation, there are aspects that are “grey” and open to interpretation. By using Catax as expert advisers we will maximise the claim within the boundaries of the legislation.