The R&D tax credit bill (introduced to Parliament in October of 2018) will replace the existing system of Callaghan Innovation R&D grants with a tax credit system.

Under the Callaghan grant system, tech companies obtained taxable grants equal to 20% of the cost of eligible R&D activity.

Under the new system, tech companies undertaking eligible R&D activity will receive a tax credit equal to 15% of their eligible R&D expenditure, which can be applied to reduce tax due in the current year, or carried forward to subsequent years if there is no tax to offset.  Initially, loss making companies will only have a limited ability to cash out these tax credits.

The headline value of the two schemes is broadly similar, since a 15% tax credit is more or less equivalent to the after-tax value of a 20% grant.

However, the R&D costs that are eligible to be deducted under the two schemes are quite different.

This difference is going to be felt by NZ tech companies developing software products, including SaaS products.  Many NZ software companies are currently recipients of substantial Callaghan R&D grants.  However, as the NZ Angel Association, the NZVCA and others highlighted in a joint submission, these software companies are going to find it hard to meet the new eligibility criteria.

Software product companies dominate NZ’s venture-funded tech ecosystem.  We therefore expect this eligibility gap to cause some interesting discussion at the Select Committee hearings on the Bill later this year.

*Andrew was recently invited to join the IRD’s advisory group on the R&D tax credit regime, and attended the first meeting of the group in January.