How would you use R&D Tax Credits to develop your product further?
A successful start-up company will typically have a five-stage journey:
- Solving the problem
- Development
- Entering the market
- Scaling
- Maturity
Along the way, there will be many challenges and problems to resolve, including accessing grants and managing cash flow, undertaking capital raises, and a potential final stage – an exit.
You need the right expertise in your camp, fighting your fight and looking out for what you don’t know you need to look out for. A team that works together to get your business to the end goal.
HOW CAN WE HELP WITH YOUR R&D JOURNEY?
Accessing R&D Tax Credits
With an R&D tax specialist, you can put your confidence in an experienced professional who has developed knowledge of the complexities of this notoriously difficult area. Technical knowledge concerning R&D tax goes a long way to ensure your claims are successful, so by working with us, you can approach making a claim with greater confidence.
There are two options for R&D tax credits, both outlined below. We are happy to meet with you, discuss these options and work out the best path for you and your business.
R&D Tax Incentive
Summary
- The R&D Tax Incentive (RDTI) helps a wide range of businesses to undertake more R&D, which in turn grows New Zealand’s knowledge economy.
- The RDTI is a 15% tax credit on the money you invest in eligible research and development (R&D) in New Zealand.
- If you can’t use the tax credit to offset your tax liability (e.g. you are in a loss-making position), some of the tax credit may be refundable.
- Applies from the 2020 income year.
- The Application involves a two-step process, including a requirement to apply for General Approval for the R&D Project, then through an annual claims process.
The Detailed Process
Step One – Confirm Eligibility
The first step is to confirm whether your organisation qualifies for the RDTI. The core concept here is whether you are a taxpayer in New Zealand and whether you either own the results of the R&D or can use the results without payment.
Your R&D activities must also meet the defined criteria. We will work closely with you to review your R&D activities and advise whether they are likely to qualify for the RDTI. The RDTI regime has its own definition of R&D, which goes beyond whether something is “new”.
Your R&D activity must:
- Occur in New Zealand and follow a systematic approach.
- Seek to resolve scientific or technological uncertainty.
- Seek to create new knowledge, or new or improved processes, services or goods.
- It needs to address any uncertainty that a competent professional in the relevant field cannot resolve without undertaking a systematic course of an investigation.
- The knowledge required to resolve your uncertainty cannot be publicly available.
- It must not be a specifically excluded activity. There are a number of activities that have been excluded by the Government for specific policy reasons, for example, research in social science, arts, or humanities.
We also consider your R&D expenditure, as there are specific rules around what expenditure will or won’t qualify for the RDTI.
Step Two – Application for General Approval
We then lodge an Application for General Approval. To do this we need to break down your R&D activities into core and supporting activities and calculate the relative costs. The Application for General Approval is due 7 May (for a 31 March balance date). For example, the Application for General Approval for the year ending 31 March 2022 is due on 7 May 2022.
Once the IRD grants its approval, it gives you certainty around whether you will be able to claim this 15% tax credit for your R&D expenses. This Application can be valid for up to three years, so think of it as providing an ongoing benefit for your business.
We recommend we complete the Application for General Approval as soon as possible so you can spend with confidence.
Step Three – Supplementary Return
Each year, we need to submit the Supplementary Return. This is essentially the tax return that calculates the RDTI each year, based on actual costs and revenue. We go beyond what a computer algorithm can do here, as we will hunt through your P&L, and work with you to identify as much eligible R&D expenditure as we can.
We also calculate what portion of the RDTI is refundable. The Supplementary Return is due on 30 April of the following year (for a 31 March balance date). For example, the Supplementary Return for the year ending 31 March 2022, is due on 30 April 2023.
R&D Tax Loss Cash Out
- A cash payment of up to 28% of eligible R&D expenditure
- Essentially a “refund” of your tax loss, up to a certain amount
- Treated like an interest-free loan from the Government, to be repaid by way of tax on future profits from your R&D activity
- This is an annual application that we file with your Income Tax Return.
The R&D Tax Loss Cash Out process has been around for a few years.As a result, it is reasonably streamlined and more straightforward in terms of IRD processing. However, it is still essential to paint the best picture possible in your application, which is where we come into it. We are experts in dealing with the IRD on these applications. We know the rules. And we also go further – we hunt through your P&L and work with you to identify as much qualifying R&D expenditure as possible.
The R&D Tax Loss Cash Out is essentially an interest-free loan from the government. It allows you to ‘cash’ out your tax losses now, rather than wait to make a future profit to be able to utilise their benefit. The loan is paid back out of your future tax payments. However, there are several scenarios that can also trigger a repayment liability, such as the sale of the IP. We also work with clients looking at an exit to advise on the tax implications of a sale of the IP, and the best timing in terms of triggering an R&D Tax Loss Cash Out Repayment Event. Depending on your future circumstances, the loan may or may not be required to be repaid.
In the meantime, if you qualify for the R&D Tax Loss Cash Out, we strongly recommend going down this path as you can get up to 28% of your R&D expenditure back in cash. We love working with our clients on these applications as we see the positive impact these payments can have in terms of their cash flow and growth, or even just pushing the cap raise out for another year – meaning the R&D development is more complete and the share values have increased.
Compliance – Financial Statements and Income Tax Returns
Understanding the financial complexities of running a successful business is critical to continued growth and sustained performance, so it pays to have access to the very best knowledge and experience. However, when it comes to start-ups and R&D intensive businesses, the difference between a basic understanding and full expertise can be critical to the growth of your business and raising future capital.
There are ongoing questions as to recording details, categorisation of expenses, and the “right” time to recognise the R&D IP on the balance sheet. There are tax losses to protect, and options to defer expenses. These are fundamental questions that need to be answered in the context of your business and your goals.
As such we work with our R&D clients closely, as part of their team. The measure of success is not just whether we can complete financial statements and file your tax returns on time, we strive to ensure we add real value to your team. We love being part of the start-up R&D journey.
GET IN TOUCH
We strive to add value to our clients. We are not just a computer algorithm based overseas, we are local experts that work closely with our clients throughout their start-up journeys
Want to talk about your ideas? Your journey? Get in touch to arrange your complimentary introduction session now.
*This publication contains generic information only. NZ Tax Desk Ltd is not responsible for any loss sustained by anyone relying on the contents of this publication. We recommend you obtain specific taxation advice for your circumstances.
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