Government

Labour bolsters R&D tax credit plan

Small businesses are the biggest beneficiaries of the Government’s redesigned research and development tax credit package, but questions remain over whether it will benefit the loss-making firms that need it most, Thomas Coughlan reports.

The Government has increased its tax credit for R&D spending to 15 percent from 12.5 percent and halved the threshold to $50,000 to help small businesses. 

Research and innovation Minister Megan Woods and Revenue Minister Stuart Nash announced the Government’s long-awaited R&D tax credit scheme this morning. It comprised a 15 percent tax credit for R&D spending over $50,000 and a scheme for loss-making firms to claim tax credits.

Eligible expenditure will be capped at $120 million, meaning the maximum credit will be $18 million. 

It represents a change from the Government’s initial proposal. It had proposed a 12.5 percent tax credit on “eligible” R&D expenditure for firms that spent over $100,000 on R&D.

There had been concerns the $100,000 threshold for claiming the credit was too high for SMEs and that a tax credit scheme would exclude businesses that were not yet profitable. 

Companies with large R&D expenditure often post losses for several years as they spend heavily on early R&D and expansion. Accounting software company Xero is still chasing its maiden profit after twelve years of operation.

The system replaces the Growth Grant scheme operated by Callaghan Innovation. That scheme will be steadily wound down until it is phased out completely in 2020. 

Loss-making businesses still lose 

The Government’s changes still mean loss-making businesses are on a short leash. 

It has proposed a temporary solution that will run in the first year of the scheme, but it is restrictive. To qualify, firms need to be able to attribute part of their losses to R&D expenditure and have at least 20 percent of their total labour expenditure dedicated to R&D.

And the potential gains are much smaller. Loss making firms will only be able to claim up to $255,000 or 15 percent of R&D expenditure up to $1.7 million, 72 times smaller than the grants for profit-making firms. 

This would represent less financing for firms like Xero, which was given a Callaghan Growth Grant in 2014. The grant was for 20 percent of R&D spend, capped at $5 million per year. 

A more permanent fix will be developed over the next year. 

Woods told Newsroom the second round would involve extensive consultation with affected firms.

"We always said at the time we launched the consultation pre-profit companies needed some extra work."

She said the temporary measure had been adopted because the Government did not want to leave those firms "with nothing".

Woods would not confirm whether loss-making firms would receive significantly more than they had done under the Callaghan Growth Grants scheme when the final scheme was eventually rolled out. 

The billion dollar question

New Zealand lags behind on R&D spending. OECD data shows New Zealand’s spending on R&D was just 1.2 percent of GDP in 2015, compared to the OECD average of 2.3 percent. The Government’s goal for the credit is to boost R&D expenditure to 2 percent of GDP.

New Zealand's R&D spend lags behind the OECD average. Source: OECD

Firms will be able to claim up to $120 million each under the scheme. The Government has set aside $1 billion for the scheme over the next four years. 

A pre-Budget briefing paper from MBIE said that private sector R&D investment would have to rise from 55 percent of total R&D expenditure to 40 percent to achieve this goal.  

Currently, economy-wide R&D expenditure was funded 55 percent by the private sector. MBIE projected economy-wide R&D investment will need to increase by $4 billion from $3.7 in 2018 to around $7.7 billion in 2028 to achieve the Government’s 2 percent goal.

MBIE assumes $2.5 billion of the extra spending will come from the private sector, with the balance coming from the public sector. That would bring the total cost of the scheme to the Government to $3 billion in 2028. 

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