Britain is on a war-footing in the fight against the coronavirus pandemic and industry has responded to government’s call to arms by making ventilators for the NHS. However, in recent weeks many respondents have been told that their efforts are no longer required and are now facing huge cost write-offs. The tax implications of the abortive costs are not yet known but this may be a cruel blow for those that have incurred such expenses.
The Government recently backed out on various agreements for thousands of ventilators designed by business, such as a group of Formula 1 teams and doctors. The treatment of these abortive costs from a corporate tax perspective is yet to be considered and may be another upset for these companies.
The tax answer is invariably “it depends” and ultimately the treatment will be fact and circumstance specific. The basic rule is that for companies to avail themselves of a corporation tax deduction the costs must be wholly and exclusively for the purposes of the trade. To the extent that the costs are capital in nature these would not be deductible in the year in which they were incurred but may qualify for capital allowances, depending on the nature of the capex.
Whilst tax is rarely binary, it is reasonable to assume that the companies that have incurred the abortive costs will have to consider the appropriate tax treatment of those costs in line with the purpose of the trade of the company that incurred them. If this is a company that normally manufactures vacuum cleaners or racing cars, for example, it is hard to see how an argument could be supported that the abortive costs of producing a ventilator comprise costs of the same trade. Putting aside the debate as to whether the costs should be trading or pre trading expenses, the companies might get some relief for the costs against the profits of their normal trade.
It seems a little harsh that British businesses responded to the government request and are now faced with a mountain of costs and possibly no, or limited, means of tax relief. It could be argued that these are unprecedented times, and this calls for some form of extra statutory concession. As compelling as that sounds in theory, it is unlikely that the government would agree to some form of one-off deduction, the theory being that it might leave any such concession open to abuse or any such precedent being relied upon in the future.
There is one line of enquiry worth pursuing, however - R&D tax credits. Where companies have created a new product, identified a solution or done something in a novel way the expenditure may qualify for R&D tax credits. Abortive costs qualify irrespective of success of the project, provided the expenditure criteria is met.
It is not possible to opine on specific cases, but there is a risk that at least some of the costs incurred by these businesses will not qualifying for a tax deduction. Hopefully this will not dissuade these captains of industry from being altruistic in the future and they may qualify for R&D tax credits on their abortive costs.