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Research and Development Tax Incentive – Guidance on claiming software development R&D and upcoming due dates

Tax Alert - April 2022

By Simon Taylor & Brendan Ng

There has been some confusion over the ability of software to quality for the Research and Development Tax Incentive (RDTI) ever since the new regime was first proposed. It is therefore pleasing to see the release of Digital Technology Sector Guidance (Digital Sector Guidance) for the RDTI, highlighting Inland Revenue’s views of the types of software development R&D that can qualify for the RDTI. The Digital Sector Guidance provides insights into the type of technical information that is expected to be included, as well as practical examples of completed General Approval applications.

This article covers the new Digital Sector Guidance, as well as a reminder about upcoming deadlines with recently announced extensions. R&D performers will be aware that there are two main outputs they need to prepare if they are using the General Approval method, being the General Approval application and Supplementary Return. Both of these have upcoming deadlines and, if they haven’t already, it is important for claimants to complete the process in time so that they don’t miss out on any potential benefit.

This is especially true for businesses that were previously receiving Growth Grants, as for many this will be the first year they are able to claim the RDTI. Previous Growth Grant recipients may also be eligible for the Transition Support Payment, which allows a top-up to bring the total amount of R&D financial support to a similar level as received under their former Growth Grant. Eligibility for the top-up payment depends on a number of things, including being able to show that a “good faith” attempt is made to participate in the RDTI.

The first lodgement to consider is the General Approval application, containing the written description of a business’ R&D activity and why it meets the RDTI eligibility criteria. For a standard March balance date, the 2021/2022 application will be due on 7 May 2022, and careful consideration of the content maximises the chances of a smooth claim process.

A list of due dates for common year ends is set out below, noting that Inland Revenue has recently released a short COVID-19 extension for balance dates between 31 December 2021 and 31 March 2022 that have been affected by the impacts of the current COVID-19 outbreak.

Source : - page 4

For other balance dates, the Minister of Business Innovation and Employment (MBIE) has released a claims date finder. Note that the COVID-19 extension will only apply due to material delays or disruptions because of circumstances arising either from COVID-19 or COVID-19 response measures. This could include the impact of a key staff member or advisor having reduced availability, or the financial impact of COVID-19 causing significant disruption to the normal business operations of the taxpayer.

The second lodgement required is the Supplementary Return, which captures a business’ eligible R&D expenditure, for which a 15% tax credit can be claimed. For taxpayers that submitted a 2020-2021 General Approval application, the due date for the 2020-2021 Supplementary Return is fast approaching – the ordinary due date is 30 April 2022 for taxpayers with an extension of time, extended to 2 May 2022 because 30 April falls on a weekend. However, there is also a short COVID-19 extension available for all balance dates provided the requirements are met. 

Following calls for clarity on the eligibility of software development, Inland Revenue has released Digital Technology Sector Guidance to assist those performing R&D in the digital technology field. This and other eligibility documents can be found on the Inland Revenue RDTI eligibility page. While the underlying legislation remains the same, the digital sector guidance is a welcome move and contains some practical examples of what is required to assist with considering eligibility and preparing General Approval applications.

The guidance clarifies that there are many layers of information to consider when assessing eligibility and making a General Approval application, and illustrates the essential parts that are required in the form of a dartboard graphic (replicated in this article). This shows that a General Approval application should include (but is not limited to) the following:

  • A clear scientific or technological problem/knowledge gap (keeping in mind the knowledge horizon and technology limits in the specific scientific or technological field);
  • Methods and experiments to be used/undertaken;
  • An R&D plan and milestones;
  • A description of metrics and success parameters (that meet product requirements and specifications).

The digital sector guidance also describes examples of types of the underlying technology that may underpin R&D, including cognitive / analytics, security, future networking, digital reality, cloud, robotics and quantum technologies. This is not an exhaustive list, however, and other areas such as system uncertainty (which is included in other general Inland Revenue Guidance) may also qualify. The guidance highlights that the technology used in the R&D should be the focus, rather than the commercial product being developed.

The guidance also describes types of core, supporting and excluded activities, and indications of when qualifying R&D activities start and finish.

Examples are also included of successful and unsuccessful applications, showing the types of activities and information included in each outcome. The examples are:

  • An approved application for a smart facial recognition security system on a building site, showing the technical problem of how to develop a security solution that uses AI facial recognition, a cloud-based server and cameras to identify personnel. This was eligible for the RDTI.
  • This security system is also accompanied by an ineligible example of how a business may seek to develop a similar commercial product (i.e. the smart facial recognition security system), but how this may be undertaken in a different way such that it is not eligible R&D and the General Approval application is declined.
  • There is also the development of a legal search platform for the building code, which is a further example of an eligible and approved General Approval application.

The guidance should be referred to closely in preparing General Approval applications – we have already seen many instances of reviewers referring to its content when assessing applications. Ongoing feedback is also being sought by Inland Revenue on the content of the guidance.

It is positive to have this guidance available to assist taxpayers, advisors, and possibly more importantly reviewers, understand when software can be eligible for the RDTI. After some resistance to acceptance of software claims when the RDTI regime first began, we have now supported a number of taxpayers to make successful software-related claims across a range of different areas.

For more information, contact our specialist R&D team or your usual Deloitte advisor.

April 2022 - Tax Alerts

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