Section 28: Expenditure on Research and Development: Consumable Items
Summary
1.This section restricts the expenditure in respect of consumable items that qualifies for research and development (R&D) tax credits. In the circumstances where a company sells or otherwise transfers ownership of the products of its R&D activity as part of its ordinary business then the cost of materials that go to make up those products is excluded from expenditure qualifying for relief. This restriction will apply to expenditure incurred on or after 1 April 2015.
Details of the Section
2.Sections (1) and (2) amend section 1126 Corporation Tax Act 2009 (CTA 2009) so that the expenditure defined by that section as attributable to relevant research and development is further qualified by new sections 1126A and 1126B.
3.Section (3) sets out the additional rules that define attributable expenditure.
New section 1126A
4.The new section 1126A adds to the attribution rules in section 1126.
5.Subsection (1) excludes certain expenditure on items such as materials, components or machine parts making up a finished product. Where such items are both used in the development of a product and are part of the product that is then transferred for consideration in the ordinary course of business, the cost of the items included in the transferred product will not be qualifying expenditure.
6.Subsection (2) excludes expenditure on certain items which are used in a production process that itself involves some element of research and development. Where this process results in those items being transferred for consideration in the ordinary course of business then the cost of those items transferred will not be qualifying expenditure.
7.Subsections (3) and (4) require an apportionment to be made between non-qualifying and qualifying expenditure on consumable item where not all of the product referred to in subsections (1) and (2) is sold or transferred. The effect is that if some of the product is retained for additional trials, or discarded as sub-standard, the costs of the consumable items in the retained or discarded products will remain qualifying expenditure and will not be excluded by subsections (1) or (2). This applies whether the product is a single item measured in terms of volume or weight (subsection (3)), or is made as discrete units (subsection (4)).
8.Subsection (5) ensures that reference to producing an item refers to the entire process, including the use of ancillaries, such as packaging, that might be required before it is transferred.
9.Subsection (6) ensures that reference to a consumable item forming part of a product includes situations where that item has been physically or chemically changed in some way during the production process.
10.Subsection (7) defines transfer of an item.
11.Subsection (8) excludes the provision of test results, on its own, from being consideration or the transfer of an item, covering cases where an item is supplied for evaluation or testing with no other recompense to the person who created it.
12.Subsection (9) provides that the transfer of waste and scrap items is not a transfer in the ordinary course of business, so regardless that some consideration is received for the transfer (for example, because they may be recycled or valuable substances recovered) the relevant costs will be allowable.
13.Subsection (10) defines item and relevant person.
New section 1126B
14.The new section 1126B confers powers on HM Treasury to amend the attribution rules by regulation.
15.Subsection (1) allows the rules attributing expenditure on consumable items to relevant research and development to be amended by regulations. This enables HM Treasury to take into account various ways in which R&D might be undertaken and consequently the manner in which relevant expenditure on consumable items may be incurred.
16.Subsections (2), (3), (4) and (5) set out what the regulations may amend and how.
17.Sections (4) and (5) make consequential amendments to other sections in CTA 09 that refer to the definition of consumable items in section 1126 and now sections 1126A and 1126B.
18.Section (6) makes a consequential amendment to section 1310(4) to reference the regulatory powers described in paragraph 13 above.
19.Section (7) applies these provisions to expenditure incurred on or after 1 April 2015.
Background Note
20.Additional relief for R&D costs is an incentive for R&D activity and investment in innovation. R&D tax credits provide an enhanced deduction for expenditure on R&D, including the cost of materials and other items, such as water, fuel and power transformed or consumed in the R&D activity.
21.As laid out in guidelines issued by the Department for Business, Innovation and Skills (BIS), production costs are not expenditure on R&D. In practice, where R&D activity takes place in conjunction with commercial production the attribution of the cost of consumable items, as previously defined, can be uncertain. This has led to claims for relief for costs in respect of materials and other items used in the production of goods effectively indistinguishable from normal commercial products.
22.This measure makes the relief more targeted on innovative research and development activities, rather than activities related to production. This makes it fairer for those companies that already adhere closely to the BIS guidelines.
