RESEARCH & DEVELOPMENT TAX DEDUCTIONS FOR THE SOUTH AFRICAN FOOD & BEVERAGE INDUSTRY

The aim of the R&D Tax Incentive is to promote private sector investment in Research and Development. Companies investing in R&D will be rewarded with an additional 50% deduction on Operational R&D expenses, amongst other benefits. As scientists and professionals in the field of Product Development, it is common knowledge that the innovation process is complex and technical starting from concept development of a new product, research, experimentation, new processing and manufacturing methods, quality and testing improvements, and meeting regulatory requirements.

Research and Development in the food and Beverage industries takes into account a host of capabilities from chemistry, nutritional science, biochemistry, materials science, and a host of engineering disciplines to bring a novel product to market. Whilst much of what consumers see and taste are mostly aesthetic, the scientists and engineers behind the product development know and understand this to be very different. It is highly technical and food and beverage companies invest significant resources to stay competitive and meets the needs of demanding consumers.

In order to stay competitive, manufacturers need to understand consumer preferences and offer consumer-preferred food and beverage products. These products also need to satisfy broader needs, such as regulatory and environmental considerations. There are a myriad R&D activities necessary to meet the needs of consumers, customers, legislation, cultural, sensory, nutritional, aesthetic, quality and safety requirements.

More recently, the food and beverage is under further pressure from climate change challenges to regulatory challenges to dietary and wellness challenges. The South African R&D Tax Incentive rewards companies undertaking R&D in these sectors. It is not important what the size of your company is or whether the R&D or innovation was a success or not. The criteria to qualify is defined in Section 11D of the Income Tax Act.

The R&D Tax Incentive covers the innovation process from basic research to applied research and product development. This will include research and development on new ingredients such as alternative preservatives, sweetening systems, salt reduction, allergen management, new functional ingredients. The food and beverage products will also need to satisfy certain cultural or dietary restrictions such as vegan, keto, lactose, sugar and zero sugars. This list is endless, but you get the point that R&D is necessary throughout the product innovation process from idea and concept development until commercialisation of the product.

Read more about the benefits of the South African R&D Tax Incentive for manufacturing companies

 

What is the R&D Tax Incentive – for Food and Beverage 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.

Most manufacturers involved with food & beverages are simply unaware that their investment in Research and Development can qualify for the South African Research and Development Tax Incentive. Some examples of Research and Development activities in the food and beverage industry:

  • New product or manufacturing process development
  • Ingredient research. Consideration of new ingredients. Salt and fat reduction. Fortification. Shelf life enhancement. New and more efficient processing. New preservation techniques and ingredients.
  • Shelf life analysis or testing
  • New Packaging developments to take into account environmental and food safety requirements
  • Formulating with new ingredients to achieve sensory or nutritional requirements
  • Package design for functional and aesthetic reasons as: improving shelf life, improve handling and storage, manufacturing handling and compatibility
  • Developing or improving manufacturing and packaging processes
  • Development of prototypes, running pilot trials and testing
  • New product certification requirements
  • Track and trace that may include software development and new data and monitoring systems

 

Potentially Qualifying R&D Jobs may include:

  • Food Scientists and Nutritionists
  • Chemist and Biologists
  • Food Technologists
  • Product Development Scientists
  • Process and Manufacturing Engineers
  • Packaging Engineers
  • Quality Assurance Technicians

 

How do you write-off research and development in the Food and Beverage industry in South Africa?

Yes, claiming for R&D Tax Incentive will require an investment of time, resources and expertise. Once the ball is rolling, it will reward the business with significant financial and operational benefits. Even if your company is currently operating at a loss, you will still benefit from the carryforward R&D allowances that can be carried forward indefinitely and used when the company is profitable. And, if your company were to be sold at some point in the future, the accumulated allowance may be considered as an asset when negotiating the sale of the business.

The South African R&D Tax Incentive provides a volume-based tax allowance each year for companies investing in R&D activities related to the development of new or improved products and processes. These benefits reduce your taxable income, improve your cash flow so that you could invest in more R&D, hire more R&D staff, or invest in developing your business further.

Companies in South Africa can qualify for the R&D Tax Incentive by following a simple process.

 

Qualifying expenses that are tax deductible under the R&D Tax Incentive 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:

  1. People: Salaries, wages, employers pension contributions
  2. Subcontractors: Using third parties to help solve the technological uncertainty
  3. Consumables: Raw materials consumed in the prototyping and testing process
  4. Software: Software employed as part of the R&D project

 

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