R&D Tax Credit

The R&D Tax Credit is coming, again…and, on balance, it’s got to be good news.

We expect further evolution as to where we will ultimately land legislatively, but some of our latest key observations on the proposed framework below:

• It would look like we are going to land on a 12.5% tax credit.  Compared to global concessions, this is meaningful and any higher would be really generous;
• Legislation highly anticipated from 1 April 2019.  Given the timing it would be logical to assume that some businesses will defer R&D spend to avail of the new rules.  I hope that commerciality will drive this decision-making and not a 12.5% “refund”;
• Various eligibility criteria will need to be met, including a pre-registration process, minimum spend and meeting the definition of a core R&D activity;
• A pre-registration process.  Conceptually I like this idea to provide certainty to businesses and perhaps prevent [perceived] problems of gouging the system that we had in the past.  However, it’s not quite in line with a self-assessed tax system and I have concerns for Inland Revenue regarding resourcing this process.  While the idea has merit, I’m not so sure I like the idea of a pre-registration process, only to be also audited some years later. I would hope that any audit would be restricted to eligible expenditure only and that the activity itself is not revisited;
• It is mooted that unused R&D tax credits can be carried forward to later years.  Relaxation of shareholder continuity provisions (should they apply) would be very much appreciated in this regard.
• A minimum spend of $100,000;
• We expect the current R&D cash-out of tax losses to be phased out along with the Callaghan Growth Grant.  On the former, perhaps there is an argument the cash-out of tax losses should be saved for start-up businesses that have no income to offset the credit against?

Regarding the latter, perhaps the tax credit will result in some losers? I understand that the Callaghan Growth Grant reaches some 300 worthy recipients, while the R&D tax credit is expected to reach 3,000.Will the current Callaghan Growth Grant recipients receive less overall?

• Software? Historically and globally this has been a hard one to grapple with. Either way, I can’t see an R&D concessionary regime that excludes software – not in today’s environment;
• To qualify it is expected that the R&D activity will be required to be largely carried out in New Zealand, with risks and rewards also to be borne in New Zealand.  This would mean the resulting intellectual property has to be owned in New Zealand;
• It’s not quite a “name and shame”, but expect that recipients of the R&D tax credit will have limited information on the claim made publicly available.  Such transparency is designed to help maintain the integrity of the regime.

As mentioned, there’s more water to go under the bridge and I am looking forward to further developments on this.  More to come in due course.