Recording staff time for the R&D Tax Incentive: records that stand up

What the RDTI pays for, and where staff time fits

The Research and Development Tax Incentive (RDTI) is a tax credit run by Inland Revenue, with the Ministry of Business, Innovation and Employment, through the RDTI website. Under section LY 4 of the Income Tax Act 2007, the credit is 15% of your total eligible R&D expenditure for the year, up to $120 million of expenditure. It applies when your eligible expenditure is $50,000 or more, or when you use an approved research provider. You need approval of your R&D activities first, then you claim through a supplementary return in myIR after the year ends, due within 30 days after your income tax return is due.

Schedule 21B of the Act lists three kinds of eligible expenditure: depreciation on items used in the R&D, goods and services used in it, and amounts for employees, to the extent their employment relates to performing R&D. Inland Revenue's list of employee costs covers salaries and wages, bonuses, employee share schemes, recruitment and relocation, overtime, holiday and long-service pay, and superannuation contributions. Only time that was paid counts: unpaid hours, a founder's included, cannot be given a value and claimed.

Few people spend all their time on R&D, so the staff line of a claim is a sum of fractions. This made-up example is arithmetic: an engineer with $100,000 of employee costs who spent 40% of their time on eligible R&D adds $40,000 of eligible expenditure, worth a $6,000 credit at 15%. The 40% is the number a reviewer will test, and only a time record can support it.

Contemporaneous means made at the time

The RDTI website puts it plainly: records supporting a claim must be contemporaneous, made at the same time as the activities they document, and not created afterwards, such as at the end of the tax year or the project. Inland Revenue's guidance, IR1240, says there is no absolute standard for how often a record must be kept. The test is whether it is kept often enough to give confidence that it is reliable, and records that identify who made them and when are more credible.

IR1240 describes what can meet the test:

• People who split their time between R&D and other work: a time recording system, or time on R&D estimated and reported in project documentation on a regular basis, for example weekly or fortnightly.
• People on R&D full time: monthly documentation naming who worked on it and the dates they started or stopped.
• Steady patterns: where work patterns were consistent and you can show it, apportionment based on a sample period.

Timesheets are not compulsory. But a week's hours split by activity, logged in that week, is the simplest record to defend, and an estimate written up from memory in March is the hardest.

Splitting a week between core R&D, support and ordinary work

A claim separates three kinds of time. Core R&D is the systematic work to resolve a scientific or technological uncertainty. Supporting activities are claimable only if they are required for and integral to a core activity, with supporting it as their only or main purpose. Everything else, including activities the Act excludes, stays out. Schedule 21 excludes, among others, market research, routine testing and quality control, bug testing, beta testing and user acceptance testing, and routine software maintenance.

The practical answer is to make the split when the hours are logged, not afterwards. Set up each R&D activity as its own project, ideally matching the activity named in your approval, with tasks that keep the categories apart:

• a core task for the experiments, prototypes or analysis aimed at the uncertainty;
• a supporting task, such as planning the tests, which IR1240 gives as an example of eligible support;
• an ordinary work task for the parts of the same job that are not R&D, such as user acceptance testing.

Time that serves everything, such as leave and general training, is apportioned. IR1240's example is Zach, who spent 23 weeks on R&D, 23 on other work, 2 on a general course and 4 on leave. Leaving out the shared weeks, 23 of 46 is 50%, so half the course and half the leave count too: 26 of 52 weeks, half his salary. If the R&D happens inside commercial production, only the staff's contribution to the R&D counts, so the record has to separate R&D duties from standard production work.

What a reviewer asks for, and why dates matter

If a claim is selected for review or audit, you get reasonable notice and must provide the information reasonably needed, which can include access to your staff. IR1240 lists the records that help. For staff time, two matter most: project or activity details showing how many hours each employee worked on the project, which part of it, and their hourly cost; and a worksheet showing how each line of the claim was calculated, reconciling to the amount claimed. Keep them, like other tax records, for 7 years. If the records are not enough, the credit, or part of it, can be disallowed.

Dates are what separate a contemporaneous record from a reconstruction. A record that shows when each week's hours were finished, and dates every later change, answers the question before it is asked. The R&D time record sits on top of the wages and time record the Employment Relations Act already requires, set out in our article on wage and time records for employers.

Team timesheets from jobtracker.co.nz lets you set up each R&D activity as a team project with its tasks, so they appear in everyone's picker. People log hours against them on the day, with a note on each entry if you ask for one. Each week shows when it was marked sent, and every change after that is kept with its date. A CSV for any period lists the entries by person, date, project and task, ready for your claim worksheet. Hourly costs stay in your payroll, because nothing is read from the pay or rates in anyone's own account; any cost rates the Owner and Admins type are the team's own figures, for margin. Each person chooses whether to share their hours, so agree with your R&D staff at the start that they will. It does not hold the activity record itself, the uncertainty and the systematic approach, which belongs in your project documents. It costs $6.99 a seat a month, GST included, for at least three seats, and our page on Team timesheets for professional services shows the same project and stage set-up for client work.

Contractors' time and invoices

When you pay a contractor to perform R&D for you, section LY 6 makes the eligible amount the contract amount less the contractor's own ineligible expenditure. IR1240's example is a $1,000,000 contract, less $200,000 of depreciable property and $70,000 removed by the feedstock rule: $730,000. If the contractor is associated with you, you can claim only the lesser of what you paid and their costs. A contractor performing R&D for a New Zealand business cannot claim the credit for it themselves: the business that commissions it does, and no expenditure can be claimed twice.

You remain responsible for the claim, so set the records up in the contract:

• require the contractor to keep records of the work and to give you access if Inland Revenue asks;
• have them invoice R&D and other work separately, or itemise the work closely enough for you to classify it;
• ask them to confirm in writing what, if any, of their spending was ineligible.

R&D performed overseas is mostly ineligible, and at most 10% of your total eligible expenditure can relate to it, so contractors' records should also show where the work was done.

R&D hours, logged as the work happens