Revamped R&D tax incentive eligibility guidance expected to benefit software industry

New guidance has been released to lower the requirements to qualify for the 15% refundable R&D tax incentive, which is already making it easier for businesses developing software to qualify.

The research and development tax incentive (RDTI) provides a 15% refundable tax credit on expenditure incurred to conduct eligible research and development (R&D) and is available to businesses from the 2019/20 income year onwards. R&D activities must occur in New Zealand, seek to resolve scientific or technological uncertainty, follow a systematic approach, and seek to create new knowledge, or new or improved processes, services or goods.

Although the incentive has only been available for a short period of time, early claimants have alerted both EY and the Government that the eligibility criteria to qualify has been narrowly interpreted, with a significant proportion of complaints coming from the software/IT sector. In a very welcome move, the Government has released updated R&D activity eligibility guidance to bring the bar to qualify back down to the original policy intention, which was to cover scientific research all the way to experimental application of existing technologies and techniques to seek new or improved outcomes.

The key takeaways from the revised guidance include:

• Revising the interpretation of “new or improved” from a comparison to what is available in the public domain, to simply requiring an intention to have a material purpose to create a new or improved outcome that is “better” than the original. This means that claimants only need to show that they intended to achieve a better outcome than their previous efforts.
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• Broadening “scientific or technological uncertainty” from whether an objective is scientifically or technologically possible, to include uncertainty how an objective can be achieved in practice. This change is key for software R&D, as most software developers are certain that an objective is technologically possible but can have uncertainty how to leverage existing tools and methodologies to achieve the objective.
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• Acknowledging that uncertainty of a scientific or technological nature can arise from the adaptation of existing knowledge or capabilities, or the use of known processes, technologies and methodologies where the result or outcome is unknown. This is important for software because software development commonly involves the use of existing methodologies and technologies to achieve an objective, hence this should not prejudice the ability to qualify.
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• Clarifying that scientific or technological uncertainty can arise in relation to whether an output will meet desired specifications such as response time, reliability or cost, or how the desired specifications can be achieved amongst possible alternative methodologies or solutions. This is especially relevant for software development, where there can be many different pathways to build a functionality but it’s unknown which will provide the most efficient and effective result within budgetary constraints.

It’s important to note that while the bar to qualify has been lowered, there are strict documentation requirements that remain. The RDTI requires claimants to submit “core R&D activity” descriptions as opposed to “R&D project” descriptions, hence descriptions should focus on the specific core technological components of a project that meet the R&D definition rather than broadly covering the wider project. Components of a project that do not meet the R&D definition but are directly related to and are required to conduct core R&D activities may be claimed and need to be separately documented as supporting activities. This can be tricky for software development projects which tend to be highly integrated hence it can be difficult to separate core R&D from supporting R&D activities.

If you had previously discounted the RDTI due to the prior eligibility guidance or have not explored this incentive before, it would be worth evaluating your eligibility to claim under the revised guidance. A good starting point for businesses to evaluate whether they now qualify for the RDTI is to evaluate whether they have undertaken or plan to conduct activities which involve scientific or technological uncertainty regarding how to achieve a new or improved outcome.

You can read the new 5-page R&D activity eligibility summary here.

Our New Zealand EY Government Incentives team has a combined 60+ years of dedicated R&D tax incentives experience on a global scale. We can provide end to end support on RDTI claims, ranging from the initial evaluation of activity eligibility, advising on how to present claims, preparation or review of activity descriptions, calculation of qualifying expenditure, and liaising with the authorities to answer queries and seek claim approval.

If you would like to discuss how these revised guidelines affect your business, please reach out to one of our dedicated team members below for a discussion.