Muted response to Research and Development tax incentive

Michael Snowden, chief executive of OneNet.

Businesses won't be rushing in and claiming the new Research and Development (R&D) tax credit to be introduced in April next year, according to the Mood of the Boardroom survey.

Respondents were asked: "Do you expect your business will make a R&D tax credit claim when the proposed new regime comes into force?"

Just 31 per cent said they would. Forty-three per cent of them said they wouldn't make a claim and 26 per cent were unsure.

Just over 50 per cent of the respondents said the tax credit would not incentivise their business to direct greater resource than currently into R&D, while 26 per cent indicated they would increase R&D and 23 per cent were unsure.

Those supporting the introduction of tax credits include Beca's Greg Lowe who believes greater support for R&D will lead to an increase in New Zealand-owned and created intellectual property.

"We develop new technology and service offerings and R&D support will increase this investment."

But warns Andrew Hamilton of incubator The Icehouse, "beyond the tax credit regime, this will not change the fact that we don't have enough firms who want to do R&D, including our big firms".

There was a good deal of scepticism about the move with typical comments including, "what past experience shows is that all an R&D incentive will do is encourage businesses to classify BAU as R&D to claim the tax credit", "seems open to manipulation", and, "these are gamed under all regimes".

A banker noted: "Good ideas get funded anyway."

But entrepreneurially focused respondents were favourable.

Suse Reynolds of the Angel Investors Association says many of the businesses angel investors support will use the tax incentive if it is "clear, cost effective and easy to claim".

The Government's R&D tax incentive is designed to help more businesses undertake a greater amount of research and development and is a shift from relying purely on Callaghan Innovation grants.

A minimum $100,000 spend is required to qualify and the proposed 12.5 per cent tax credit rate places New Zealand mid-pack among OECD countries.

Ministry of Business, Innovation and Employment, Inland Revenue and Callaghan are producing final recommendations for the scheme, and legislation is due to be introduced this month so the R&D tax incentive can be in place by April 1, 2019.

Minister of Research Science and Development Megan Woods says the Government has an ambitious target of lifting New Zealand's lagging economy-wide spend on R&D from 1.3 per cent to 2 per cent of GDP over the next 10 years.

"The R&D tax incentive will be a key lever in reaching this goal. Eligible businesses paying tax will be able to benefit from this policy from day one.

"Lifting the amount Kiwi businesses are spending on R&D will help diversify our economy by encouraging new industries and businesses to innovate. The R&D tax incentive will be one form of support among many for Kiwi firms to move further up the value chain and deliver higher wages."

CEOs were asked to state their preference for measures New Zealand should take to encourage greater R&D and innovation. Fifty-eight per cent of survey respondents were in favour of the R&D tax incentive, 6 per cent for the existing grants regime, and 30 per cent for reducing the corporate tax rate applying to all businesses.

Michael Snowden of OneNet says R&D should be done because it improves the firm's profitability and productivity, not to chase an ephemeral tax subsidy. The technical difficulties of obtaining credits from the IRD may make the effort not worthwhile for smaller firms.

"The definition of R&D is loose, and as soon as there is a financial incentive the accounting treatment of normal operating costs may be reclassified as R&D.

"The grants system is too much of a lottery. A lower tax rate would benefit every business," he says.

Anna Stove of GlaxoSmithKline says the tax credit will make no difference to her company. In countries like Australia and the UK, pharmaceutical R&D investment is enormous. "Because Pharmac doesn't fund innovative medicines, multi-national companies won't do their R&D in New Zealand. There is no return on investment."

The EMA's Kim Campbell cautions, "we need to be competitive with other jurisdictions, and whatever we do it must cause a major change in behaviour because what is currently in place is not working.

"The rates proposed at 12.5 per cent are far too low to be competitive with Callaghan grants and the suggested criteria of original science will limit participants among SMEs and using IRD with all that ambiguity together makes for a poor plan," he says.