Plan to axe R&D credit 'wasteful'

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National's plan to cut research and development tax breaks to help pay for personal tax cuts are "wasteful and confusing" and greatly disappointing for some firms, business leaders say.

National is moving "one step forward and two steps back" cutting government spending in the wrong areas, according to a manufacturers and exporters group.

Business New Zealand also disagreed "pretty seriously" with the decision to drop R&D tax credits but said the planned tax cuts and target to cut personal tax rates to 33 per cent over time rated a "seven out of 10" score overall.

The just-introduced research and development tax credits were expected to cost more than $200 million this year and more than $630 million over three years.

The regime applied for many businesses from April this year, allowing them to claim a tax credit of 15 per cent of eligible research and development spending.

Recently National said it would scrap the $700 million Fast Forward fund for agricultural research and move some of the R&D tax credit for business to fund science directly.

The Manufacturers and Exporters Association backed the personal tax cuts but said National was planning to cut spending in the wrong areas to pay for the tax cuts.

"The costs outweigh the benefits," chief executive John Walley said.

The change would push New Zealand back to the bottom of the OECD ladder in terms of government support for research and development.

Business had already spent money preparing for the tax breaks.

"Abolishing the credit now is extremely wasteful and confusing," Mr Walley said.

Business New Zealand chief executive Phil O'Reilly said cutting the research and development tax credits was "unfortunate and unhelpful".

Some companies had invested in accounting and reporting systems for the tax credit regime, and they would be very unhappy.

"So what is plan B if you are not using that [tax break] to encourage innovation?" he said.

There had been concerns from government officials that the tax breaks were open-ended and there could be a cost blowout.

The tax credit scheme came into force only in April and Mr O'Reilly said it should have been given more time to see if it worked.

KPMG tax partner Paul McPadden said the National plan to drop the tax breaks would disappoint many firms, and was a huge shift in policy from National, which only last week said it would reduce the 15 per cent credit rate to 10 per cent.

"Now it is being abolished, [if National is elected]" Mr McPadden said, which would mean an effective tax increase for some businesses.

Mr O'Reilly applauded National's tax cuts as generally sensible, rating an overall seven out of 10 score.

The plan to move to a broader, flatter tax structure would help boost economic growth.

"That is one of the most important things any government could do," he said.