R&D Tax Credit Policy Finalised – How does it look for manufacturers?

11 October 2018

After consultation with the public and businesses, the Government released the final details of its R&D tax credit policy. The policy is not perfect, with areas in which we are going to push the Government further, but they did listen to some of our concerns and made adjustments to the policy and we are happy that a number of these issues we at least partially addressed in the final policy. 

In our submission, we pushed for the initially-proposed rate of 12.5% to be increased to 20% to start with.  This would bring our innovation support closer to what is offered in many of the countries our manufacturers are competing with, both in export markets and through import competition. While the Government did not raise it that high, they did increase the rate to 15%.  This is a definite improvement, but we will continue to push the Government to raise this higher over time – this is something they need to do if they are serious about reaching their target of improving New Zealand’s R&D expenditure to 2% of GDP by 2020. The slightly higher rate will make this a bit more worth the effort for smaller companies and align the system with growth grants for the larger companies who were receiving them.

The second major issue we outlined in our submission was the proposed threshold for eligibility – requiring a minimum of $100,000 of eligible R&D expenditure to receive the tax credit is too high. We pushed for this to be significantly lower to make sure small companies have the opportunity to benefit and put them on a path for growth and even more R&D expenditure in the future. Again, while the new threshold is not as low was we would have liked, we are pleased to see the Government bring this down to $50,000.  Most small and medium-sized manufacturers were left out under the previous project grant system – we hope this change is a move in the right direction to provide support for our small and medium-sized manufacturers. 

The other area of major concern for us in the proposed policy was the definition used for eligible R&D expenditure. This was based on a definition (Frascati) that would have excluded much of our manufacturers work in the area of process innovation. Even though the original proposal did say that process innovation and development could be included, those who have used project or growth grants in the past know how difficult it can be to have this included in grant applications. 

Again, we are pleased to see this being partially addressed in the new definition of R&D expenditure, which on the surface appears to be more open to such process development activities.  However, the test will really be how this is followed through in practice – the Government needs to set the clear expectation to IRD that process development innovation is included.

Overall – while this policy is not perfect, we are happy that the Government has at least worked to address some of our major concerns from the initial proposal.  There are still areas in which we need to push the Government to make R&D support work most effectively for manufacturers, and we will continue to do so.  Getting innovation policy right is critical for New Zealand’s future – we have some catching up to do with many of our competitors in terms of overall spending as a country.  Innovation through R&D is a vital component of moving New Zealand down a more productive and prosperous path to the future.