Research and Development Expenses are tax deductible at an Additional 50% for the Healthcare Industry
It is well known, the healthcare industry makes significant investment in healthcare IT solutions to improve data management and integration of services in the healthcare system. R&D can often be driven by regulatory changes. We are seeing a lot of R&D in respect of The Internet of Things (IoT) that helps connects monitoring devices to cloud servers that communicate with hospital central databases and healthcare facilities. The cloud servers can facilitate electronic patient monitoring and delivery of healthcare services. Research and development is a key driver of growth in the healthcare industry. Healthcare services, products, and treatments require significant investment in R&D and Innovation to treat new diseases and illnesses. The delivery of healthcare treatments are constantly evolving to detect, diagnose, monitor and treat new illnesses and diseases. Innovative thinking coupled with advances in Science and Technology critical to ensure better healthcare
What is the R&D Tax Incentive – Healthcare companies in South Africa?
The R&D Tax Incentive in South Africa is provided for in Section 11(d) of Income Tax Act. The SA R&D Tax Incentive reduces the after-tax cost of R&D conducted by companies. The Tax Incentive or Tax allowance in SA allow firms investing in R&D to deduct more from their taxable income than they actually spend on R&D. The tax Incentive is a deduction from taxable income that allows companies to deduct an additional 50% for R&D Operational expenses. The value of a tax allowance depends on the corporate income tax rate. At a corporate tax rate of 28% in SA, this translates to a 14% tax benefit from SARS. A company that invests R1 million on R&D can obtain a tax benefit of R140k. There are no limits: there is no cap [floor or ceiling] on the absolute amount of R&D that can be claimed; or a cap on the maximum amount of the tax incentive that can be deducted.
An unused tax allowances in the year of assessment may be carried forward to offset future tax under normal loss carryforward provisions. Allowing the tax allowance to be carried-over increases its value to firms incurring losses in a given year, particularly smaller companies that are unable to make a current tax claim or tax credit due to insufficient taxable income.
In South Africa, two areas of R&D are particular interest viz., the further development and improvement of Generic medicines and Clinical Research. This work is likely to be eligible for tax incentive under the government’s R&D Tax Incentive Scheme, making it an important consideration in tax planning and adding value to your R&D projects.
How do you write-off research and development in the Healthcare industry in South Africa?
Healthcare organizations that invest in R&D in an attempt to develop or improve products, processes, software, or technologies may be eligible to qualify for the South African R&D Tax Incentive. The R&D projects do not have to successful to qualify. Attempting to make incremental improvements may be eligible. You may be eligible for the tax incentive whether your business is directly conducting the R&D, or contracting third party contractors. R&D is volume-based, and there is no threshold or ceiling to the amount of the projects or the size of the tax incentive.
Eligible Healthcare Research and Development activities
Below is a non-exhaustive list of tax deductible R&D activities in the Healthcare industry:
- Conducting of Clinical Trials in Phase I, Phase II and Phase III
- New Apps to monitor patients health
- Development of Generic medicines
- Non-routine testing and development of medication and devices
- Developing and devising prototypes.
- Carrying out of clinical tests conducted prior to commercialization, and generating prototypes for testing and validation.
- Advanced Algorithms to assist with data management
- The use of Blockchain technology for healthcare applications
- Design and manufacturing of prototype medical devices
- Development and testing of new pharmaceuticals, therapies, biologics, or other medical compounds
- Improving existing products to increase shelf life, reduce side effects, or prolonged duration of therapeutic activity
- Production of clinical trial lots and initial scale-up of manufacturing processes
- Support of research and development activities, such as quality testing, maintaining lab equipment, data collection and analysis, validation data analysis and regulatory compliance testing
- Development of New medical devices or equipment
- Prosthetic and biomechanical devices and advances in design and capability
- Development of new Diagnostic software
- The use of Artificial intelligence to improve healthcare
Qualifying expenses that are tax deductible in South Africa:
There are some of the R&D cost categories that qualify as business expenses that qualify for an additional 50% tax deduction. These expenses cover your healthcare innovation expenses from the idea development to the end of the development phase, or transfer of technology or until the start of the commercialisation phase:
- People: Salaries, wages, employers pension contributions
- Subcontractors: Using third parties to help solve the technological uncertainty
- Consumables: Raw materials consumed in the prototyping and testing process
- Software: Software employed as part of the R&D project
Research and development is the number one focus in the healthcare industry. Healthcare services, products, and treatments require continuous innovation to treat new diseases and illnesses. The delivery of healthcare treatments are constantly further improving in order to detect, diagnose, monitor and treat new illnesses and diseases. As a result, the world of healthcare is changing rapidly due to innovation and technology.
Staff costs that may qualify for the R&D Tax Incentive:
- Pharmacists
- Laboratory Scientists [Chemists, Technicians, Managers]
- GMP Personnel
- Process Engineering
- Quality Assurance and Quality Control
- Validation Pharmacists
Have questions? Contact Vantage R&D Tax Incentive Advisors