Draft refinements to the Research and Development tax incentive

Written on 11/10/2022
Nexia SAB&T

Government is proposing to extend the Research & Development (R&D) tax incentive beyond 31 December 2023 – likely for a period of 10 years following a consultation process with industry stakeholders.

The proposed amendments include the following:

  • Refining the definition of R&D to make it simpler to understand and adjudicate, resulting in an easier application process;

  • Clarifying that the intention has always been that the incentive should only apply to activities with an aim of solving a scientific or technological uncertainty;

  • Moving away from an “end-result” or IP statute approach to recognise the reality that R&D involves uncertainty and risk, and that it is not practical to expect taxpayers to have detailed knowledge of how their envisaged R&D activities will unfold at the time of applying for the incentive;

  • Instead, moving towards incorporating some principles of the OECD Frascati Manual, i.e. that activities should be novel, uncertain, systematic and transferable and/or reproducible;

  • The suggested approach allows for the removal of the “innovative” requirement from the definition of R&D, which has yielded unintended complexity and misunderstanding (government recognises that innovation can happen without R&D, and that it does not necessarily encompass R&D);

  • To ensure that R&D activities are non-obvious or inventive to qualify for the incentive, the revised definition should include the test of whether a professional in the field with appropriate knowledge and skills would resolve that scientific or technological uncertainty without undertaking any R&D activities (i.e. systematic investigative or systematic experimental activities);

  • To amend the exclusion for internal business processes so that – if an activity is systematic investigative or systematic experimental with an aim of resolving a scientific or technological uncertainty and it meets the proposed (revised) definition of R&D for the purposes of this incentive, it should be considered R&D – regardless of whether it is intended for sale or the use thereof is granted to connected parties;

    Introducing an exclusion for agrochemical products such that activities conducted solely in preparation for the registration of products to comply with the Department of Agriculture, Land Reform and Rural Development are excluded from the incentive;

  • Introducing a six-month grace period for receipt of pre-approval applications to allow smaller applicants, new applicants or applicants undertaking R&D in a new field to gather more information regarding the intended R&D activities so that they are in a better position to provide detailed information and thus benefit from the incentive;

  • Introducing an information disclosure requirement to allow the Commissioner of SARS to disclose certain information to the Minister of Higher Education, Science and Innovation that will enable a better monitoring and evaluation function; and

  • Introducing sanctions for breach of secrecy.

It is envisaged that the proposed changes to refine and simplify the legislation, combined with the move to an online process and enhancing the application process for smaller businesses, should enhance the uptake of the incentive. We will keep you informed of developments in this regard.

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