Earlier access to cash for some R&D Tax Incentive applicants

The Research and Development Tax Incentive (RDTI) has continued to be improved since it was reintroduced in 2019/20. The RDTI now has 1779 businesses enrolled (compared with just over 500 in the first year of operation), with $265 million of tax incentives having been paid by the Government. This has supported private sector investment in R&D of $1.77 billion so far.

Eligible taxpayers will now be able to receive payments for their Research and Development (R&D) during the year under a new in-year payment scheme, allowing quicker access to cash. Previously certain claimants would have to wait until the year had ended to prepare, file and wait for their R&D Supplementary Return to be assessed by Inland Revenue, before receiving any cash benefit from the RDTI regime.

Key features of the new regime include:

• Ability to access up to 80% of RDTI tax credit/refund during the claim year through an interest-free loan;
• Requires approval of activities in place through General Approval process;
• Loan application requires details of eligible R&D expenditure;
• Loan is ordinarily repaid as part of R&D Supplementary Return filing process.
  

Under the new scheme, during the year a taxpayer can receive an interest-free government loan for the amount of tax credit/refund that a taxpayer would be eligible for in that period, with the Supplementary Return process used at year-end as a ‘wash up’, to cover any underpayments or overpayments. The introduction of this scheme follows the Ministry of Business, Innovation and Employment’s (MBIE) announcement last year, which is covered in a previous Deloitte Tax Alert article, and the scheme will be administered by Tax Management NZ (TMNZ).

Who is most likely to benefit from RDTI in-year payments?

Businesses that will benefit the most will be those that have no provisional tax to pay or businesses operating at a tax loss (or having losses carried forward) and in some cases profitable businesses whose RDTI tax credit exceeds any provisional tax due. Taxpaying companies can factor in the RDTI tax credit in their provisional tax payments to obtain a cash benefit during the year (by paying less tax throughout the year to Inland Revenue). This is an option that is not available to taxpayers with losses or who do not have a provisional tax obligation.

Businesses that are operating at a loss or businesses that have no provisional tax to pay can only obtain a benefit from the RDTI at the end of the year when their Supplementary Return is processed and their RDTI tax credit refunded in cash. However, the in-year payment scheme allows these businesses to get a cash loan throughout the year.

The cash loan will be based on a taxpayer’s eligible RDTI claim for each instalment period i.e., their actual R&D costs for the period. The loan will be capped at 80% of the actual R&D expenditure in the period (as a conservative measure) and a taxpayer can claim as much or as little of its R&D expenditure in each period (up to the 80% cap). At the end of each year the taxpayer will still be required to file a Supplementary Return, at which point the remaining R&D expenditure can be claimed (such as the remaining 20% of R&D expenditure and any other R&D costs not captured earlier).

The in-year payments application and process

To be eligible for the new in-year payments a business must be a going concern and be performing R&D activities that have been approved as eligible for the RDTI (i.e., a business will need to have an approved General Approval (GA) application). To fully benefit from the new scheme, it is advised that GA applications should be filed at the earliest convenience to have access to the in-year payment scheme. GA applications can be lodged from the start of the relevant financial year, up to the 7th day of the second month after year-end (7th May for 31st March balance dates) or may be covered by multi-year approvals from prior years.

What the process will look like:

• Get an approved GA application for the relevant period.
• Register on the TMNZ website for the in-year payment scheme, which includes:
  • Going through Anti Money Laundering (AML) and Due Diligence (DD) checks.
  • Granting TMNZ the authority to access your Inland Revenue RDTI account to check R&D activities and expenditure details.

Once this has been completed and a business has been approved for the in-year payment scheme, they are eligible to make a payment request. In the given income year, a business can request up to three payments at regular intervals. The dates of these payments/requests have not yet been announced. The information that a business provides may be subject to audit by MBIE, so it is crucial the information that is submitted is accurate and can be backed with evidence.

In each payment request, a business will be asked to record all actual eligible expenditure they wish to claim. It is up to the business to determine which expenditure they wish to include, which flows through to the size of the loan that the business wishes to take out. Given it is a loan, some businesses may wish to keep their loan within a certain limit to manage loan exposure and the ability to repay the loan. If a business is intending to offset an amount of provisional tax, this will have to be advised in the payment request. If a business has more than one GA application approved, it will have to include the expenditure associated with each GA application on the same loan.

When is the loan repaid?

The loan will be due to be paid back on the earliest of either:

a) One month after IR has approved or declined a Supplementary Return (SR), or

b) Six months after the due date of the business’s RDTI SR.

If a business fails to repay the loan at the relevant due date above, interest will accrue on the loan at the rate of Inland Revenue’s Use of Money Interest rate at the time. The business will also be ineligible to receive another loan until the outstanding loan has been repaid.

Example of loan payment calculation:

A business with an income year ending 30 June 2022:

• Has an approved GA application; and
• Requests a payment based on actual eligible expenditure of $300,000; and
• Advises that it intends to offset $25,000 of its anticipated RDTI tax credit against provisional tax due during the period covered by the payment.

What should I do next?

If in-year payments of the RDTI tax credit are something your business may be interested in, there are a number of considerations that need to be worked through, particularly the need to have General Approval(s) in place to cover the activities claimed. We recommend that 2024 income year General Approvals are prepared and lodged as soon as possible if you wish to benefit from the in-year payments regime. If you think your business is eligible and will benefit from the introduction of in-year payments, we recommend you get in touch with the specialist Deloitte R&D team or your usual Deloitte advisor.

May 2023 - Tax Alerts