It was only fitting that Methven chief executive David Banfield presented a slightly bemused Prime Minister with his company's latest showerhead at today's R&D tax credit launch.

After all, the product was developed with the help of matching R&D funding from Crown agency Callaghan Innovation, which dished out a total of $149 million in grants last year.

But from April 1 next year, Callaghan's Growth Grants programme will be axed, with a 15 per cent R&D tax credit becoming the new mechanism for boosting research and development.

Science Research and Innovation Minister Megan Woods says business will be better off under the tax credit scheme because more companies will be covered. She says around 300 firms are eligible for Callaghan Growth Grants today, but around 2000 will qualify for the new tax break.

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A decision to bump the tax credit from 12.5 per cent to 15 per cent and lower the minimum annual R&D spend to qualify from the originally proposed $100,000 to $50,000 will draw in many small businesses, she says. By contrast, a company had to spend at least $300,000 a year on research and development to qualify for a Callaghan Growth Grant.

Another change to widen the net: any R&D work contracted to a university or Crown Research Institute - say, a $10,000 project commissioned by a small business - can be claimed under the new tax credit.

Woods quotes MBIE research that says Callaghan's Growth Grant formula of partial matching funds equates to a 14.4 per cent R&D tax break. That means a company like Methven will come out slightly ahead.

L-R: Revenue Minster Stuart Nash, Science Research and Innovation Minister Megan Woods, Prime Minister Jacinda Ardern and Methven chief executive David Banfield at this morning's announcement. Photo / Chris Keall.
L-R: Revenue Minster Stuart Nash, Science Research and Innovation Minister Megan Woods, Prime Minister Jacinda Ardern and Methven chief executive David Banfield at this morning's announcement. Photo / Chris Keall.

National's R&D spokeswoman, Parmjeet Parmar, says Callaghan Growth Grants covered 20 per cent of a company's R&D spend.

Woods says her 14.4 per cent figure takes into account an average grant recipient's total tax picture. She adds that only around 300 companies are eligible for Callaghan grants.

Parmar jabs back that she's concerned about the lack of detail around compliance costs for business.

EY tax lead David Snell says if compliance too complex and progamme costs too high, few firms will apply for the tax break. But if the compliance bar is set too low, costs could blow out. He's picking a high bar. Photo / Supplied.
EY tax lead David Snell says if compliance too complex and progamme costs too high, few firms will apply for the tax break. But if the compliance bar is set too low, costs could blow out. He's picking a high bar. Photo / Supplied.

EY tax policy lead David Snell also flags compliance costs as a potential complication. He says it will be the crucial determinant of whether business are better or worse off under the tax-break regime.

"A burdensome compliance framework will reduce take-up," he says.

"Conversely, a too-relaxed set of rules will lead to low-value claims, programme costs blowout and scale-back of the R&D tax incentive in three or four years at most."

Snell is picking the compliance bar will be set relatively high, so the Government can keep a lid on costs.

Woods responds, "Businesses will naturally face some administration costs when going through the process. However, a priority for IRD is to ensure the process is user-friendly to navigate and that costs are kept to a minimum."

But while there might be a number of regulatory hoops to jump through, and Woods has listed a number of exclusions, Snell says the Government still has to tighten its definition of R&D.

"I'd like to see comprehensive guidelines and exclusions to prevent pseudo-science from being claimed, especially covering the IT and manufacturing sectors," he says.

Methven boss Banfield makes diplomatic comments about both the R&D tax break and Callaghan grants, but also notes that a universal tax break gives his company certainty with its planning. There will no longer be the need to constantly compete, and reapply, for grants.

Parmar is dubious the Government can stay with the $1 billion allocated in this year's Budget to cover the R&D tax break's first four years.

National's R&D spokesperson, Pamjeet Parmar, asks why the estimate of eligible companies has dropped from 3000 to 2000. Photo / Supplied.
National's R&D spokesperson, Pamjeet Parmar, asks why the estimate of eligible companies has dropped from 3000 to 2000. Photo / Supplied.

As Exhibit A, she points to Australia, where spending on an R&D tax incentive scheme ballooned from an originally budgeted A$1.8b ($1.9b) in 2011 to A$3b last year, Woods maintains our version will stay within budget.

Parmar also notes that an MBIE discussion document said 2000 to 3000 firms would be eligible. She questions why the number was scaled back to 2000 with the official announcement.

Woods says MBIE has done thorough modelling, and that the increase to 15 per cent won't blow the billion-dollar budget. "We left a lot of headroom," she says.

Technology Investment Network chief executive Greg Shanahan says the R&D tax credit scheme appeals because "it's more streamlined and there's less bureaucracy."

Instead of the Government trying to pick winners, as it does today with Callaghan Growth Grants, with applicants wading through mountains of paperwork as they compete for funding, any company that carries out R&D will automatically qualify for the tax break.

There is a complication on that front, however. National, which scrapped the Clark-Cullen government's short-lived 12.5 per cent R&D tax break when it came to power in 2008, says companies gamed the system the first time around, claiming all kinds of spending as research and development.

Woods counters that the previous tax credit was only in place for months; too little time for any conclusions to drawn about attempts to rort the system.

She adds that there will be more detailed guidelines about what can and can't qualify for the R&D tax break (and an MBIE discussion paper indicates the enabling legislation will be quite prescriptive; it says a laundry list of items including market research, cosmetic changes to existing products and costs associated with seeking patents won't be eligible, for example).

There's also the factor that unlike Callaghan Innovation, which in at least one instance has brought in the Serious Fraud Office as it's struggled at times to police guidelines, enforcement is bread-and-butter for Inland Revenue. Woods adds that IRD also has a range of financial penalties at its disposal when dealing with rule breakers.

But Parmar points out that across the Tasman, the Federal government has began a clamp down on rorting.

There has also been concern that New Zealand's R&D tax break is lower than Australia's.

However, Woods points out to that Australia scaled back its scheme with this year's Budget to 13.5 per cent for firms on the lowest company tax rate, while some large firms will receive as little as 4 per cent. And while the UK, Norway, France and a number of other countries have schemes that offer more generous headline tax breaks, the Minister points to the OECD's "B-Index", an attempt to compare countries on an after-tax apples-with-apples basis that shows a much more level playing field (see table at the foot of this story).

EY's Snell says that, overall, the 15 per cent R&D tax break will make New Zealand an attractive place for multinationals looking for a location for research and development work (any company with an "established presence" in NZ will qualify. Conversely, locals can carry out up to 10 per cent of their R&D work overseas - a concession to not every facet of R&D being available in NZ).

But then there's the broader problem that R&D tax breaks just don't seem to have worked across the Tasman.

Woods says the Government wants to boost R&D spending as a percentage of GDP from the current 1.3 per cent to 2 per cent within a decade - though even that would still lag the OECD average of 2.38 per cent.

And, worse, OECD figures show R&D spending in Australia has actually tailed off since a tax incentive scheme was introduced seven years ago.

In 2011, research and development spending as a percentage of GDP stood at 2.11 per cent. In 2013 it was 2.01 per cent. By 2015, it had fallen to 1.88 per cent in the Lucky Country.

Woods says the Australian system was overcomplicated. A lot of time was spent talking to officials across the Tasman about why their system went off the rails.

Revenue Minister Stuart Nash adds, "When we talked to the Australians, they said: 'Look, can we give you some advice? Don't do it the way we've done it.' They've had a bit of a nightmare and in the last Budget they've had to pull some stuff back. But we've learnt from their mistakes."

Woods and Nash had no comeback for another Parmar criticism, however: that the policy announced today has nothing for businesses that make a loss.

Entrepreneur Doug Hastie and others have noted you can't claim an R&D tax break if you have no profit to tax - a common situation for startups, where a lot of innovation occurs.

It's still not clear how loss-making companies will be catered to under the new regime. Woods says the Government ran out of time for the required policy work ahead of the new tax year.

She's bought time by rolling over National's policy for another year (which sees a loss-making company that spends at least 20 per cent of its labour budget on R&D able to claim up to $255,000 or 15 per cent of R&D spending up to $1.7m).

Where to now for Callaghan?

Where now for Callaghan Innovation and its 384 personnel, now that Growth Grants are being phased out? Chief executive Vic Crone, who was on hand for this morning's launch, says it's too early to comment on the impact of staff numbers. But she plays down developments. She says 200 of Callaghan's staff are scientists and engineers (many inherited from the former Industrial Research Ltd) whose role is to be on tap to assist the private sector with R&D, while others are involved with smaller project grants and student programmes that will remain. Only a handful of staff directly work on Growth Grants, she says.

Woods talks up Callaghan's role. She says both MBIE and Callaghan worked on the policy. announced today, and that Callaghan will continue to have a major role supporting the R&D sector.

While no Callaghan Growth Grants will be awarded after March 31 next year, some existing grants run through to March 31, 2021. Double-dipping will not be allowed as the tax-break and Growth Grants run in parallel up to that point.

Woods says this will be easily pleased. "We're dealing with a very small number of companies," she says.