Companies in the Manufacturing Sector can qualify for major tax deductions through the R&D Tax Incentive in SA

In the era of Covid-19, when manufacturing companies face significant challenges, one of the most generous tax benefits for companies in South Africa should not be overlooked. This is the South African R&D Tax Incentive that applies to manufacturing companies, amongst other industries. Those not familiar with the term R&D may find more information on our blog

The business mantra has always been ‘Cash is King’ Well, the R&D Tax Incentive does just that – it rewards companies undertaking R&D with an additional 50% Super Deduction on R&D Expenses. This results in a 14% reduction in tax liability to SARS, effectively increasing your cash flow or increasing profit.

 

The R&D Tax Incentive came into effect through Section 11D of the Income Tax Act. The R&D Tax Incentive is, unfortunately, one of the least understood tax allowances for businesses undertaking R&D in South Africa. The R&D Tax Incentive has been in effect since October 2006, yet companies appear reluctant to capitalise on the benefits. Perhaps this is due to the technical nature of the R&D Tax Incentive, since it requires an understanding of what activities can be classified as R&D. Furthermore, in order to qualify for this Tax Allowance, the taxpayer must apply for the approval of the R&D projects or activities, before said activities are undertaken.

 

“Be wary of strong drink. It can make you shoot at tax collectors… and miss.”

Robert Heinlein

 

Basically, the R&D Tax Incentive is open to all companies conducting R&D in South Africa, irrespective of the size of the company or which sector it is operating in. Research by the Department of Science and Technology shows that roughly 35% of all companies that apply for the Tax Incentive, come from the Manufacturing sector. This is significant, and means that as a manufacturing company, there is a high possibility that you are conducting R&D, but leaving money on the table. This cannot be pleasing news to a shareholder.

 

It is important to note that the R&D Tax Incentive was implemented to encourage more investment in R&D, and development of new and/or improved products, designs or processes. This is a valuable opportunity to reduce your tax liability. You can use the savings to invest elsewhere in your business to become more competitive, grow your business, or simply increase cash flow and profitability..

Here are some of the activities where Manufacturing companies are undertaking R&D:

  • Project briefing [understanding and interpreting the technical requirements]
  • Design meetings [collaboration between your team and clients]
  • Flat Blank Layouts [design modifications and improvements]
  • Tool Making [design, build, trials]
  • Engineering Process [new equipment specifications, shop redesign, etc.]
  • Proof of Concept [process documentation, etc.]
  • Trial Production [first run of new product, resolving technological challenges]
  • Quality Approval [PPAP, ISIR, etc.]
  • New Manufacturing process design
  • Change of material and design configuration.
  • Retooling of machinery to improving efficiency, quality or performance of an existing product

 

“There is no such thing as a good tax.”

Winston Churchill

 

If you are working on a new design proposal, the activity can qualify even if you are not successful in winning the new business..

The key is to carefully understand your business and identify the activities and projects that may be eligible. You then evaluate the activities against the R&D Tax Allowance criteria to determine whether they qualify. You then estimate the labour, materials, and other resources [be it external consultants, etc.] that will be required to achieving the end result. This information is then captured in an application form that is submitted to the Department of Science and Technology for approval. You are then good to go.

 

Contact Vantage for a complimentary assessment to check whether your company can qualify.