FREQUENTLY ASKED QUESTIONS

Yes. The objective of the R&D activity is important, not the outcome of the project. You can still qualify for the R&D Tax Incentive, even if outcome of the project is not achieved.

However, the project needs to be pre-approved by the Department of Science and Technology, before you can qualify for the R&D Tax Incentive. If the project was pre-approved, the success or failure of the project in terms of meeting its overall commercial goals is irrelevant for the purposes of determining its eligibility for the SA R&D Tax Incentive.

Software Development can qualify for an additional 50% ‘Super’ tax deduction through the R&D Tax Incentive in South Africa. In accordance with the guidelines for the R&D Tax Incentive, the Software Development project has be pre-approved by the Department of Science and Technology to qualify for the ‘Super’ deduction.

The following types of Software Development activities may be considered eligible R&D activities under Section 11(d) of Income Tax Act:

• Theoretical Computer Science – R&D producing new theorems and algorithms
• Operating Systems –Technological advances in:
  • Technological improvement in resource and interface management
  • A truly new operating system; or
  • The conversion of operating system to a significantly different hardware environment
• Programming Languages –Technological advances in
  • New languages
  • Significant extension of an existing language; or
  • New or significantly different language translators
• Data Management –Technological advances that include the development of:
  • Algorithms to achieve better basic operations (e.g. retrievals from a database)
  • New or enhanced query languages for databases that significantly increase the power or search or manipulation; and
  • New object representations or data structures.
• Software Engineering – Advances in the methodology required to construct computer programmes with greater flexibility, efficiency, reliability and ease of maintenance.
• Artificial Intelligence – Scientific and technological advances made in the domains of:
  • Machine Vision
  • Robotics
  • Inference
  • Knowledge Representation
  • Expert systems
  • Theorem proving
  • Understanding of natural language
  • Automatic language translation
  • Logic programming and
  • Future generation Systems

Startup companies who are not yet generating a revenue can also benefit from the South African R&D tax incentive. Section 11[d] of the Income Tax Act allows firms that are not yet in taxable position to carry forward the tax credits until they are in a position to deduct it.

Receiving approval for the Research and Development Tax Incentive could also be useful in building the case for raising external funding.  Unfortunately, as the R&D Tax Incentive does not allow a cash refund, the benefit still presents a challenge for startup firms who may take some time to be in a taxable position, and then maximise on the benefit.

For Software Development to be classified as R&D, the aim of the project must be to achieve a scientific or technical advance in software. In other words, you must be attempting to resolve a certain scientific and or technical uncertainty.

To be eligible as R&D, Software Development must follow systematic investigative and systematic experimental activities. These activities must be conducted in a planned logical sequence, generally using a recognised methodology and with detailed records maintained. Experimentation in the form of a series of tests, for the purpose of discovering something unknown or testing a hypothesis, is undertaken and problems identified and investigated along the way, resulting in an ultimate finding.

Vantage starts with a free or complimentary review of your company status and R&D activities. This provides your business with the information needed to make an informed decision about whether you can qualify.

As R&D specialists, our team can help identify projects and activities that are eligible for the South African R&D Tax Incentive. Should your business then wish to qualify for the R&D Tax Incentive, we can tailor a plan to support your business.

We handle the challenging pre-approval process, improve awareness of the requirements with your staff, and support you in ensuring compliance.

The South African R&D Tax Incentive provides an additional 50% ‘Super’ tax deduction on R&D expenditure. This means that 14% percent of the money you spend on R&D expenses can be recovered as a tax allowance from SARS. Reduce company income taxes and improve your future cash flows.

The R&D Tax Incentive allows a company to reduce its company tax in South Africa. This generous government incentive allows an additional 50% deduction on operational R&D expenses from taxable income. This equates to a net 14% tax benefit that reduces SARS tax liability, and increases the company cash flow

1. Labour costs for all employees who conduct or directly supervise or support qualified activities.
2. Materials & supplies used in qualified activities, including extraordinary utilities, excluding capital items or general administrative supplies. 
3. Utilities such as water and fuel (including gas and electricity)
4. Contractors of qualified R&D activities
5. Books, journals, reference materials, subscriptions to libraries, scientific societies
6. Non-capital purchases of materials, supplies, equipment and services to support R&D
7. Rental or lease costs of computers or IT services
8. Rental of buildings to support R&D

To qualify for the tax incentive, the R&D activities must meet the definition of R&D in section 11D [1] of the Income Tax Act:

“Research and Development” means systematic, investigative or systematic experimental activities of which the result is uncertain for the purpose of:

• discovering non-obvious scientific or technological knowledge
• creating of developing an invention or functional design
• making a significant and innovative improvement to any invention, functional design, computer program or knowledge
• creating or developing a multi-source pharmaceutical product
• conducting a clinical trial

The risk of SARS rejecting your expenses are lower since since your R&D projects have been pre-approved by an Adjudication Committee comprising SARS officials

As with any other tax assessment, SARS may conduct an audit of expenses.

Rejection of expenses may be likely if they have not been appropriately identified or categorised.

A taxpayer claiming R&D expenses under the R&D Tax Incentive in South Africa must retain records in adequate form and detail to substantiate that the expenditures claimed are eligible for the incentive.

Types of documents may include:

• Design of experiments and project planning documents
• Project records and laboratory notebooks
• Progress reports and minutes of project meetings
• Test protocols, test results, analysis of test results and conclusions
• Staff times sheets and tax invoices

Vantage can help determine whether, and to what extent your records meet the requirements of Department of Science and Technology and SARS, and what types of evidence you may use to support your tax claim.

You may also refer to SARS audit guidelines.

R&D does not only take place in a laboratory. Nor does it only take place at Tesla or SpaceX or Apple. R&D is taking place whenever a company looks to improve something or come up with something totally new. It is the day-to-day activities of trying out new materials, ingredients, components to improve functionality, reduce costs, improve performance. The range of R&D is extensive and takes place in almost every industry from FMCG, Healthcare, Engineering, Software Development, and so on. It is therefore, worth taking a moment to check whether your activities meet the criteria for R&D Tax Incentive. If yes, then you could qualify and save a significant sum of money every year simply because you are innovating to introduce better products or services.

The incentive was designed to encourage private-sector investment in Scientific and Technological Research and Development. It also aims to promote global competitiveness by allowing companies to reclaim some of the money invested in qualifying research and development activities. It was introduced to help the country achieve a target for R&D expenditure of 1% of GDP. The scheme has been in effect since year 2006.

The R&D Tax Incentive is a government incentive designed to encourage and reward certain types of R&D activities. The Tax deductions reduces your tax liability on a rand-for-rand basis and can be claimed in addition to the deduction for those expenses that generate the credit.

In the case of the research and development tax allowance, the goal is to encourage and incentivise businesses to undertake research and development related activities in South Africa, either through new or improved processes, products or software.

Research and development expenditures that qualify for the allowance include:

• Salaries paid for technical, support or supervision personnel
• Supply expenses for materials used in R&D activities
• Outside contractor costs for third parties assisting with R&D activities
• Pilot plant
• Prototypes
• Indirect expenses

The R&D Tax Incentive was first enacted in 2006. The Act underwent a significant amendment in October 2012.

It is also known as the Scientific and Technological Research and Development (R&D) Tax Incentive. It is covered in Section 11[D] of the Income Tax Act.

The R&D Tax Incentive offers a generous opportunity to receive business tax-saving benefits when attempting to improve their products or services, as well as trying to create new products, services, software, generic medicines, materials and devices. The R&D Tax Incentive is open to any size of business in any industry in South Africa. The R&D Tax Incentive also covers Phase I, Phase II and Phase III Clinical Trials conducted in South Africa.

The R&D Tax Incentive only covers R&D activities that are conducted in South Africa.

The R&D expenses that can be deducted include Operational Expenses and Pilot Plant, Prototypes, Dies and Moulds.

Operational expenses includes salaries, consumables, software and overheads.

Plant and machinery qualifies for a 50:30:20 Accelerated Depreciation over 3 years.

The cost associated with the development of Generic Medicines.

Expenses for Phase I, II and III Clinical trials are included as business expenses that qualify for the R&D Tax Incentive in South Africa.

• Any R&D activity conducted outside South Africa will not qualify.
• Social Sciences, Arts or Humanities will not qualify, as opposed to, e.g., Engineering or the Physical, Biological, or Computer Sciences.
• Activities to collect routine data or ordinary testing for quality control of existing components.
• Any market research; management, consumer preference testing.
• Software intended primarily for the taxpayer’s use.

The entity must be a company as defined in the Income Tax Act [ITA].

Individuals, Non-Profit Organisations and Trusts are not eligible for the R&D Tax Incentive under Section 11D of the Income Tax Act.

Only qualifying companies that are going concerns can claim because they pay corporate tax.

Beyond these, any registered tax paying company, of any size, in any sector of the economy can qualify for the R&D Tax Incentive in South Africa.

In order to qualify for the R&D tax incentive, you must be attempting to develop something new or improving a product, process, design or software. Activities related to product development / improvement, manufacturing process development / improvement, or software development / enhancement typically meet the qualification criteria for the tax incentive.

Examples of qualifying activities include:

• Development of new, improved or more reliable products, processes or techniques
• Development of prototypes or models
• Design of tools, jigs, moulds, fixtures or dies
• Development or customisation of software
• Automation and/or streamlining of internal processes

In order to qualify for the R&D Tax Incentive in South Africa, businesses must pass a four-part test:

1. Permitted purpose. As indicated above, you must be attempting to develop a new product, or improve an existing, product, process or software.
2. Eliminate uncertainty. Discover information to eliminate uncertainty concerning capability, methodology, or appropriateness of design.
3. Process of experimentation. Substantially all the activity constitutes a process of systematic experimentation, or systematic investigative work
4. Technological in nature. Discover information that fundamentally relies on principles of hard sciences.