Introduction 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.