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To Consume or Not to Consume – That is the Question

We’re not talking chocolate, sticky buns, the odd tipple or anything else like that. We’re talking things that might qualify for R&D tax credits.

Consumption is relevant as R&D tax credit claims comprise two key elements – people costs (wages, salaries and the like), and consumables, such as materials that are used or transformed during R&D. This doesn’t just include materials/chemicals/reagents etc, but also dedicated water, fuel and power, and certain specialised software.

For years there has been uncertainty as to what qualifies, but at last we have some definitive guidance/legislation on this.

The broad thrust of the guidance is that you can’t claim something twice.

So if something ends up going into production, and is sold, you can’t claim R&D tax credit relief on it AND treat it as a cost of sale or manufacturing cost.

Prototypes have been an unclear area: these can be included in a claim provided they were part of the R&D process. They cannot be claimed, though, when they are not seeking to prove anything new but are simply an advertising tool for something like a demonstration or trade show.

This all makes sense for small, relatively low-cost prototypes, but what about very large and expensive pieces of kit? Cars? Yachts? Industrial equipment? Sadly, these are now caught under the “not for sale” rules, and none of the costs of production qualify as R&D.

So where does that leave us?

For most companies it doesn’t change things significantly. But it does mean that you will have to keep very accurate records to prove what was genuinely consumed in the R&D process, and what ended up as a cost of production. As always, it’s the detail that counts and the better your records the greater the chance of a successful claim.