Business

Why R&D tax incentives don’t stack up for SMEs

Jacinda Ardern is putting her faith in R&D tax incentives to lift New Zealand’s productivity and level of innovation. Nikki Mandow argues the government’s own numbers suggest little benefit from the much-lauded credits - when it comes to our small business sector at least.

Prime Minister Jacinda Ardern put productivity and innovation centre-stage when she outlined her government’s big “Plan for a modern and prosperous New Zealand” at the weekend.

The coalition’s four-point plan to “encourage innovation, productivity and build a skilled workforce better equipped for the 21st century” showed precious little to bolster small businesses, which make up 97 percent of our companies and 28 percent of our GDP.

Three of the four areas - free trade agreements with the UK and Europe, modernising the Reserve Bank, and liaising with the unions - are likely to have only a peripheral impact on companies with under 20 employees.

Instead, her coup de grace is the (much-heralded already) introduction of R&D tax incentives - “a key component of building a new innovative economy”, Ardern says.

The proposed scheme, due to begin in April 2019, saw companies spending at least $100,000 a year on R&D in New Zealand able to get a 12.5 percent non-refundable tax credit. Since then MBIE says it has received feedback from businesses and has reviewed the settings. The final outline of the incentives will be announced the first week of October, says spokesman Alister Newton.

The plan, according to MBIE, is that more R&D equals higher value businesses, and a chance to "ensure we are living up to New Zeaand's international reputation as a place of daring and innovation".

The trouble with relying on R&D tax incentives as the lynchpin of your strategy for small businesses, is that so few of our little companies do reserach and development, or - more importantly - need to do it.

For most of our small companies, it’s much more effective to buy in your new piece of equipment or your technology upgrade - rather than design and build the equipment or technology yourself. The wheel already exists, you don't need to reinvent it.

And in any case, the $100,000 cut-off to receive the credit is out of the range of most SMEs (though that may change with the revised version).

The Government’s own figures suggest only a small percentage of our small businesses are in scientific or high-tech areas.

It’s hard to imagine companies in the retail, tourism, or services sectors having much use for R&D. Even manufacturers, primary producers and healthcare companies would mostly be buying, rather than inventing the equipment and technology they need to be more productive. And while just over 10 percent of small companies are in the “professional, scientific or technical services” category (the sorts of companies you might imagine doing cutting edge stuff), that classification includes lawyers, accountants, vets, ad agencies - even photographers.

All we know is that only 6-7 percent of our present small business cohort will get even a potential benefit from the tax incentives (see chart below). And even bigger companies will only benefit if the new regime brings a dramatic change in behaviour.

Meanwhile, New Zealand’s productivity sinks lower and lower compared with the rest of the world. In the 1950s, our GDP per capita was 125 percent of the OECD average; now it’s 60 percent.

Bugger.

For more on the issues around SME productivity and innovation, see Newsroom’s series of articles in conjunction with Callaghan Innovation: 

Asia racing ahead of us in small business

No home, no loan. What the housing crisis means for SMEs

SME finance: Is it time govt put money where its mouth is?

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