In an effort to bolster SA’s weak research and development (R&D) track record, Government has attempted to simplify current R&D taxation.

Companies doing approved R&D work can now claim 150% of that expenditure back, which will mean a sizeable deduction on their overall tax bill.

It’s hoped that major amendments to the Income Tax Act may finally help SA boost its research output. The amendments have removed grey areas and simplified processes in which companies undertaking R&D could apply for tax incentives.

Not enough interest

Despite having introduced the tax incentive for R&D in 2007, Government has been unable to attract sufficient companies into the scheme to achieve its target R&D goals. SA’s expenditure on R&D remains lower than the OECD average at below 1% of the country’s Gross Domestic Product. The goal is to hike the figure to 1.5% in 2014.

Dov Paluch, MD of Catalyst Solutions, says companies will now have a clearer understanding of what qualifies as R&D. Catalyst Solutions is a boutique consultancy specialising in assisting companies with R&D Tax Incentives. The definition of R&D has been broadened to include companies not previously considered for the incentive. These include financial institutions and software developers involved in developing solutions for sale or lease to third parties.

Only companies, not individuals or partnerships, will qualify to apply for this tax incentive when the Act becomes effective in April. The amendments have also clarified principles relating to the funding of R&D.

Importantly, the Act has also shifted the responsibility of determining what qualifies as R&D projects from the SA Revenue Service to the Department of Science and Technology (DST), which is more suitable to undertake the task. SARS will, however, remain in charge of approving the rand value of R&D incentive claims.

Pre-approval process

Perhaps more contentious is the requirement that R&D companies must first apply for the incentive before undertaking the research. Previously companies only applied for the incentive when submitting their tax return – that is, once their research had been completed.

Says Paluch: “There may be a number of issues with this pre-approval process and the DST is busy compiling regulations to clarify this. R&D by its nature is very fluid and you don’t always know the direction of your research before you start. The DST will have to deal with the issue of some companies feeling that the process is too admin intensive. In addition, companies may be unwilling to divulge their intellectual property before they’ve actually done the research.”

However, companies don’t have to wait for approval before embarking on the research – all they need is to file an application. An R&D project conducted after the application has been filed will be considered.