The term ‘consumable items’ covers items consumed or transformed whilst undertaking compliant R&D activity, including raw materials, software licenses and utilities of any kind.
The fundamental arbiter is that the items are fully utilised within the project, at the end of which they are no longer useable in their original form because they are either consumed or transformed as a consequence. For example;
- A laboratory chemical used in the process and converted to an unusable product.
- An electronic component integrated into a larger assembly in such a way that it’s effectively transformed into part of a larger prototype and no longer available for use in other ways
In order to qualify as a consumable for R&D purposes, the item:
- Must have carried an intrinsic ‘value’ during the claim period (whether as an item of stock carried forward from the previous year or at the point of purchase );
- Must have been used within an activity (‘project’) deemed to be compliant R&D
- Must carry ‘nil’ value at the end of the claim period.
Whether these are one-off items bought specifically for the purposes of a compliant ‘project’ or small quantities of low-value items which have been taken from stock e.g. screws, paint, fuses, wiring etc., HMRC may require you to provide evidence of an audit trail to substantiate their use, and therefore the implementation of suitable record-keeping protocols is essential.
An apportionment of any expenditure on software licenses may qualify so far as the software can be shown to have been deployed in pursuit of a compliant project e.g. CAD software, whilst expenditure on proprietary software, such as MS Office, may also be apportioned in line with the overall levels of compliant activity across the business.
Careful consideration must be given in cases where the project output is considered a ‘First-Of-Class prototype’; these are usually high-end products (e.g. yachts and aircraft) where R&D is carried out on what is ultimately sold to the end-user
- Current legislation dictates that expenditure relating to consumable items used in such prototypes are non-qualifying where the prototype is transferred to a customer for ‘money, or moneys-worth’, even if the sale is agreed at a loss to the vendor.
- It is therefore essential that clients involved in large scale engineering projects or the manufacture of large, high value prototypes are able to differentiate between consumable expenditure used in items which were scrapped and any which were then sold, as HMRC will require this confirmation in the R&D claim report
- Similarly, where this results in goods or services which are subsequently sold in the normal course of a company’s business, the cost of consumable items reflected in those goods or services must be considered non-qualifying
- However, expenditure incurred for genuine prototypes, which are transferred for no consideration, remain eligible.