What is R&D Tax Relief?
R&D Tax Relief is a tax incentive scheme for innovative UK businesses, implemented by the government in 2000.
It enables any business working on innovation (bringing a new product, process, or service to market, or enhancing existing ones) to fuel cashflow by filing R and D Tax Credits every financial year.
R and D Tax Credits allow a business to recover up to 27% of the money they’ve spent on qualifying R&D expenditure, either in cash or in the form of a Corporation Tax (CT) deduction off current or future tax liabilities.*
How transformative could R and D Tax Credits be for your business? And how can you tell how much R&D Tax Relief you could be owed?
The main determiner of your R&D claim size is how much money you’ve spent on areas that HMRC consider to be ‘qualifying R&D expenditure’.
According to HMRC, there are 6 categories of qualifying R&D expenditure that can be reclaimed through R and D Tax Credits. These are:
• Externally Provided Workers (EPWs)
• Payments to the subject of clinical trials
Here, we’re going to be focusing on the fourth area of qualifying R&D expenditure – Consumables. We’ll be detailing some of the specific inclusions of this spending category to help you assess the scope of your potential R&D claim and reveal how worthwhile R and D Tax Credits can be!
Our previous blogs took a closer look at the first three categories of qualifying R&D expenditure – Staffing, Subcontractors and EPWs.
To learn more about which staffing costs can be included in an R&D claim, read our related blog - Claiming R&D Tax Relief for Staffing Costs. To better understand how Subcontractor & EPW costs are reported in an R&D claim, check out Claiming R&D Tax Relief for Subcontractors and EPWs.
What are ‘Consumables’?
For the purpose of R and D Tax Credits, consumables are items or materials that have been used up or transformed in the process of research and development activities.
To be included in R and D Tax Credits, they need to have been consumed in the direct undertaking of qualifying R&D work, rendering them no longer usable in their original form.
Typically, consumables are production and utility materials particularly evident within manufacturing, engineering, and construction R&D projects. Some examples of consumables are water, fuel, chemicals, fabrics and gas.
The change in R&D Tax Relief legislation around consumables
Prior to the Finance Act in 2015, the treatment of consumables within R and D Tax Credits was criticised for being counter-productive to the scheme’s overall mission – fuelling innovation.
In the past, businesses could work on a consumable-intensive R&D project, such as a large engineering trial, and file an R&D claim for the entire cost of the materials they used. They could then go on to sell 100% of whatever the R&D produced, meaning that these claimants were essentially getting paid twice for the same R&D work.
HMRC became aware that this legislation was flawed and allowed businesses to take financial advantage of the scheme. So, after years of deliberation, the 2015 Finance Act clarified a legislative solution.
HMRC’s rules for claiming consumable costs through R&D Tax Relief
If you sell whatever is produced by your R&D project, you are unable to include the consumable costs of the input in your R&D claim. Instead, the R&D claim can be used to reclaim expenditure for the consumables that ended up as wastage - such as the energy used to power a laboratory.
Consumable costs used in the prototype phase can still be included in an R&D claim under one key condition - their purpose must solely be research and development. This means that, if a prototype is built to be used as a demonstrations model, or an exhibit model to display at an event, that would make it ineligible for R and D Tax Credits.
‘First of class’ production
Sometimes, it’s impractical to produce an item in prototype form. Think skyscrapers, superyachts, aircrafts, and so on. This third rule recognises that projects like these require the integration of innovation with existing knowledge and technology. Previously, individual R&D projects involved in larger builds were permitted to reclaim associated consumable costs, but these costs have since been excluded by the ‘not for sale’ component of HMRC’s legislation.
The current rules for claiming R&D Tax Relief on consumable costs make it more important than ever to file your claims through an R and D Tax Credits Specialist, such as Claim Capital.
The above conditions require assistance from an experienced R&D Tax Advisor, who can analyse your consumable spending and ensure that only claimable expenses are included in your financial and technical reports. This will help you to avoid an HMRC enquiry and secure your R&D Tax Relief as quickly as possible.
If you’re conducting R&D and incurring costs on consumables, all you need to do is keep up-to-date records of your spending. With proper financial records of consumable expenditure, our R&D Tax Relief Experts can extract every penny possible and complete your maximised, fully compliant R&D claim in just 3-5 working days.
As a market-leading R&D Tax Advisor, it's our responsibility to only go ahead with an R&D claim if we're 100% certain that your business qualifies for the scheme.
So before any commitment is made, it's important for us to assess your expenditure in relation to the above 6 categories. Click below to schedule your totally free, no-obligation R&D claim consultation.
*These are the updated figures in line with the new legislation announced in the April 2023 Spring Budget.