The Labour-led Government recently released the Research and Development (R&D) Tax Incentive Discussion Document, which proposes a 12.5% R&D tax credit on eligible expenditure from 1 April 2019.

The proposed tax credit will apply to eligible R&D expenditure between $100,000 and $120 million, equating to a possible $15 million tax credit. All businesses, regardless of legal structure, will be eligible for the credit. So, the key determinant for accessing the grant will be the definition of ‘eligible’ expenditure. Two approaches are being considered. The first based on the cost of labour directly  incurred on R&D, and a second broader approach intended to capture both direct and indirect R&D costs. The proposed definition of R&D necessitates the use of “scientific methods” and requires  the resolving of “scientific or technological uncertainty”. Although the regime is intended to have a broad reach, the draft definition maybe narrow and could limit the scope of eligible R&D activities. For example, it may not encompass software/app development if it doesn’t involve traditional scientific methods, nor solve uncertainty (i.e. they are more targeted at a specific creation or result) or address a material problem.

There are also some taxpayers benefiting from the existing R&D tax credit regime that will lose out from the proposed change. Under the current regime, loss-making companies can cash-out a portion of their tax losses, providing valuable cash flow to start-up companies incurring losses in the early years of business. However, under the proposed new regime, the tax credit will not initially be refundable and the value of the tax credit will not crystallise until a business is in a tax paying position.

The above could have a detrimental impact on the cash flow of R&D startups who may not have access to bank funding or may not want to dilute equity through additional capital investment. However, the  government has indicated that it will introduce changes to support R&D businesses in tax loss positions from April 2020, so we will need to wait and see what these changes bring.

Proposed R&D Tax Credit