The Feedstock issue

If a constructed product is marketable, or placed into use within the company (as an asset) then the energy and materials (which the legislation terms as ‘feedstock’) with which it was constructed are subject to an adjustment to reduce the R&DTI benefit applying to them.

The cost of materials that are transformed or processed, and the energy used to transform or process them, are the basis of the feedstock calculation. This is not the place to try and explain this calculation which can be very complex, especially for activities where the input into the experiment has to be calculated by examining the pre-processing costs.

Transformation or processing of materials can be highly contentious, and there are legal arguments that if a construction can be dismantled into its components and those components re-used for a different purpose as if they were new, then the original construction didn’t ‘transform’ or ‘process’ them.

Whilst potentially legally arguable, we don’t advocate that approach because nobody really wants to be taking their case to court if they don’t have to.

Our approach is that consumables (things which don’t form part of the finished product) are not feedstock materials, but anything that forms a part of the finished asset is considered to be a feedstock material.

Post-processing costs are not included, so if the experiment forms part of a manufacturing process, then we will need lots of information about the stage by stage costs of the process.

We will also need information about material costs, energy consumption, and the intended use of the output (will the prototype be sold). In cases where there are volumes of prototypes some of which are saleable and some are not, then this information is also required. If scrapped product has a value (failed human food products become animal feed for example), this can trigger a feedstock adjustment.

The feedstock adjustment is applied by adding an amount to assessable income in the year in which the asset is sold (or added to the asset register). The resulting tax on that amount is therefore intended to cancel out the net benefit of the material expenditure. This was set in 2012 when the scheme was launched with a 40% offset rate for large companies, and a 30% company tax rate.

From 1 July 2016 to 30 June 2021, businesses that get less than a 10% net benefit, suffer a feedstock adjustment that is larger than the benefit gained, so there is an acknowledged approach that the materials are excluded from the expenditure, even if the experimental activities (and the labour costs incurred to conduct them) include the assembly of the asset.

Smaller businesses getting larger than 10% net benefit have usually included feedstock materials in calculations as there is a residual net gain from doing so.

Under the change of rules occurring on 1 July 2021, these imbalances are being eliminated and the post-tax effect of feedstock adjustment will match the net benefit exactly. It is as yet unclear whether the acknowledged approach of excluding materials (to avoid making disclosures and calculations with zero benefit to the taxpayer) but including the labour will be accepted.