How much of your business R&D work could qualify for the RDTI? Save yourself hours of questions from the regulators, skip the 143-page rulebook and read this cheat-sheet first.
RDTI = An Under-utilised Incentive
Since 2019, New Zealand businesses have been able to claim tax credits or cash refunds for 15% of their R&D expenses through the R&D Tax Incentive (RDTI) . However, after 5 years and much promotion, it remains unclear how many businesses are actually benefitting.
Public data is withheld two years – but the latest figures* reveal only 550 approved annual RDTI claims, involving perhaps $700M R&D expenditure. This is despite StatsNZ estimating over 2,300 businesses spending nearly $3B on R&D in the same year*.
A major reason the credits aren’t cutting through is the strict new definitions of R&D, plus the high level of scrutiny to decide if your work meets this definition. To keep everything nice and simple, this definition differs from standard accounting R&D definitions, from definitions used overseas, and even from definitions used for other government benefits. The result is that some activities a business (or accountant) would normally describe as R&D don’t qualify.
Now that’s no reason for businesses to ignore the whole program. We often find on closer analysis that many activities within a business do qualify and represent a missed opportunity for valuable funding. The key to unlocking this funding is to understand the R&D definitions.
The 5 Tests of R&D
These tests are used to find the ‘core’ R&D within your project. It’s usually a subset of your entire work. However, you only need one piece of work to be eligible as the core, then much of the ‘supporting’ work that surrounds it (e.g. project management) will also be eligible – and gets you the same funding.
- Creating new knowledge, or new/improved goods, services or processes.
- A systematic approach. Trial and error are not enough, but careful iteration can be.
- Resolving a scientific or technological uncertainty.
- Was not publicly known how to resolve.
- Nor could a competent professional have simply worked it out (without the systematic approach).
Top Tip: Find something that passes these five tests, then much other work will also be allowed.
Tests 1 and 2 mean that you can only claim for work that is sufficiently novel, careful and deliberate, as opposed to business-as-usual activity, doing something that’s been done before, researching existing alternatives, or accidental discoveries. Tests 3-5 are less straightforward. Let’s take a closer look.
Science and Technology Only!? What Work Qualifies as R&D?
The biggest limiting factor for RDTI eligibility is that only R&D of a scientific or technological nature qualifies. This includes much product development, software development and medical R&D, but does not include studies of markets, business factors, or consumer desires, nor development of your business model or commercial offering.
There is limited scope for R&D in social sciences, arts or humanities, (e.g. studies of society, culture, communities, communications, politics) but only if it supports a core scientific or technological project.
Are You Certain There’s Uncertainty?
The second key to wading through the 5 tests in the R&D definition is to focus on the ‘uncertainty’ in your work. What wasn’t known – at the start – that your work made progress towards knowing. This uncertainty could refer to the state of scientific knowledge, but most commonly is more about technology.
What capabilities or level of performance were technologically possible at the start of the R&D project? What was unknown? How uncertain were you in developing new technological capabilities? What limits and constraints did you push up against? Clarifying the uncertainty directly leads to identifying the body of work involved in resolving that uncertainty.
This is where tests 4 and 5 come in. If it was publicly known how to solve this uncertainty, or a competent professional could’ve told you how to do it, then it won’t qualify. You need to be able to report how you established these facts.
Finding and Highlighting R&D Qualifying Work
Finding and highlighting the uncertainty requires a different mindset. It’s almost the opposite of how we normally describe a new business opportunity – your elevator pitch or marketing material will be full of confidence, exciting value propositions, and new realities that are now possible.
This is the wrong way to describe your R&D for the RDTI as it downplays the uncertainties. This isn’t a pitch to investors or even a grant application. It requires a careful focus on the technical challenges in the work. This is even more important if the assessors can see a confident presentation on your website or in the public domain.
How Does This Apply to Software Development?
Software is a contentious issue, leaving many feeling the RDTI is not for them. While software development for internal business purposes doesn’t qualify, developing products for commercial purposes can, if handled correctly. The key (again) is to find the technological uncertainty in the work.
Routine full-stack development using known modules, routines, APIs and integrations to create a new product does not itself meet the threshold, regardless of how much time and money was spent. On the other hand, developing world-first capabilities for your software could qualify – once you articulate the technological uncertainty that existed at the start of the endeavour.
There is often a case to be made for uncertainty at the system level, that even if the individual components were known, the complexities of the new system mean the final technological capabilities were uncertain, especially if pushing up against challenging limits and constraints.
Take Care with Offshoring
The RDTI is intended to support R&D predominantly performed in New Zealand. You can however include some overseas expenses, but only to a maximum of 10% of your claim.
This is an important consideration when deciding what R&D to offshore. Labour and expenses may be cheaper overseas, but for the most part won’t attract the 15% RDTI credits or cash. If offshoring is only marginally cheaper, it may not be worth it.
How Much of Your R&D Could Be Funded? We’ll Help You Find Out!
The RDTI is an interest-free, non-competitive and non-dilutive funding source that can provide an ongoing 15% pre-tax reduction to your cost base.
We’ve spoken to many businesses put off by the rules or frustrated by the process, when much of their work could qualify. Could you be missing out? Get in touch to talk it over.
