In response to criticism from industry groups that the R&D tax credit scheme was too narrow, updated guidance was published by Inland Revenue in March 2021.This new guidance has an expanded eligibility summary and as a result more companies will be able to benefit from the tax credit.
The key criteria changes have been listed below:
“Has a material purpose of creating new knowledge, or new or improved processes, services, or goods”
- Then: the test of “new” was based on information that was publicly available on a worldwide basis
- Now: there can now be an “intent” to create, change or adapt something so it is better than the original
“Scientific or technological uncertainty” (definition)
- Then: no definition was provided
- Now: there is now a definition of science and technology that includes software development and science in medical, food, product development and manufacturing process improvement
“Scientific or technological uncertainty” (deducible by a competent professional)
- Then: resolving a scientific or technological uncertainty required looking at what was deducible by a competent professional in that field
- Now: a review of whether the competent professional would need to undertake a systematic course of investigation to resolve the uncertainty is required, and not just a reliance on the ‘competence’ of the professional
“Scientific or technological uncertainty” (known processes)
- Then: if a competent professional knew an existing methodology would achieve the goal, there would be no uncertainty
- Now: the use of known processes, technologies and methodologies where the result or outcome is unknown is now allowed
“Scientific or technological uncertainty” (system uncertainty)
- Then: this was not included
- Now: the guidance now allows for system uncertainty, wherein the components of a system and their interactions are known, but the outcome / result of the system cannot be deduced from the outset. For software, this is a significant development
“Uses a systematic approach”
- Then: a systematic approach involved a planned, logical investigation to solve the problem
- Now: the approach can now be flexible and adaptive in response to results, while still remaining logical and structured.
These changes have been welcomed, especially by software companies, many of which were previously excluded from benefiting under the scheme due to strict interpretation of the underlying legislation. Now more companies will be eligible for the R&D tax credit which aligns with the fundamental objective of the scheme which was to increase the amount of R&D being performed in New Zealand.
If you previously thought you were not eligible, now is a good time to review your eligibility under the updated guidance.
Here is the R&D activity eligibility summary
Here is the updated R&D Tax Incentive Guidance