Opinion

New R&D tax credits a backward step for Commercial Software* development

An opinion piece by Noel Reid, NZRise Board Member.

The Good

The Bill that was introduced recently has been accompanied by an exceptionally good effort by Officials to consult, engage and then issue comprehensive Guidance on the new rules for eligibility. Their efforts are acknowledged and very much appreciated.

The new criteria for eligibility are similar to a number of other countries’ tax credit regimes and are derived from an international definition (Frascati Manual), so from that perspective things look quite reasonable.

You can view the Bill and its’ history here, as well as our previous thoughts on the positive changes here.

The problem

The problem for the Commercial Software sector is that the bar has been raised with the new definition for “eligible R&D”, when compared to the Callaghan Growth Grant definition.  The only points for debate are “how much higher” is the bar and “how badly” will the Commercial Software sector be adversely impacted?  It definitely conflicts with an assumed Govt objective that no businesses would be worse off under the new regime.

The reality

Very little, if any, of the Commercial Software sector’s development work involves the required “resolving scientific or technological uncertainty” as defined in the Bill.  There are challenges aplenty when developing Commercial Software, but it is generally acknowledged that removing “technological uncertainty” is not normally one…

The architects of the Callaghan Grants scheme adopted an international accounting standard (IAS38) as their R&D definition, and to constrain what might have been too broad/generous a definition of R&D, added a requirement that eligible R&D had to be Innovative and have a Novelty aspect. That Callaghan requirement “opened the door” for a lot of Commercial Software R&D under the Grants scheme.

With the Innovation and Novelty tests removed, much Commercial Software R&D will struggle to quality under the new Tax Credits regime. The Guidance document is unequivocal in this respect**.

The outcome

So, regrettably, we need to record that the sector that is part of the Government’s aspirational objective of making IT #2 within the economy, has been significantly disadvantaged by the implementation of the new R&D Tax Credits Bill.

*Commercial Software means software developed for business use or commercial purposes (as opposed to scientific or non-business-related uses), and generally involves a single version or multiple variations of a core system, being licensed to multiple users at prices well below the cost of development (so scale is needed to recoup development costs).  Such software is generally made available via SaaS, on premise or hosted services.

**from P28 of Guidance. Innovation and experimental development.   You may be undertaking work which will result in a new product or service and which is innovative, substantially novel, or which involves experimental development. These terms are not defined in the legislation which governs the operation of New Zealand’s R&D tax credit. What matters for eligibility in New Zealand is that your activities have a material purpose of resolving scientific or technological uncertainty.

This is an opinion piece and is not necessarily the opinion of NZRise.  For questions or comments please contact the Co-Chairs of NZRise.

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