Budget speech 2023: Business Incentives

The research and development tax incentive was first introduced to promote private sector investment in scientific and/or technological research and development activities undertaken in South Africa.  In the Budget Speech 2023, Minister Enoch Godongwana stated that the research and development incentive will be refined to be more efficient and easier to understand.

Current regime:

A taxpayer is entitled to a deduction for expenditure that has been actually incurred in respect of qualifying Research and Development activities for purposes of an invention, a design, a computer program, and the discovery of new and non-obvious information.

The current regime allows the following:

• A deduction equal to 150% of the expenditure relating to the research and development under section 11D;

Research and development activities aimed at innovation, design, computer programs and discovery developed to be used internally to improve efficiencies are specifically excluded and taxpayers who incur expenditure that relates to such activities do not benefit from this incentive.

In addition, the application process is a complex one and the incentive will only be granted from the date that the application is made to the Minister of Science and Technology.

Proposed regime:

The following changes have been announced in the National Budget Speech 2023:

• The research and development incentive will now be extended for a period of 10 years from 1 January 2024.
• Businesses will be provided with a six-month grace period before they can submit an application.
• The definition of research and development will be refined to make it easier to understand and grasp.
• The definition of research and development will be amended to remove the “end” result approach to be in line with the OECD Frascati Manual.
• In order to enhance monitoring and evaluation, the Commissioner of SARS will be allowed to disclose certain information to the Minister of Higher Education, Science and Innovation.
• Expenditure relating to Research and Development activities which are developed for internal business processes will now qualify for the incentive.

Impact:

A taxpayer will qualify for the 150% deduction for a period of six months prior to the application date, which will allow taxpayers to properly gather all information before making an application for the incentive.

The current regime limits the application of the R&D incentive only to businesses that innovate for the purposes of selling the end product/service in the market. The removal of internal business processes from the exclusion means that any research and development activities undertaken by taxpayers to enhance internal efficiencies and improve service delivery may also qualify for the incentive.

The concept of internal business processes was an undefined concept in the legislation and often misunderstood. According to the SARS Interpretation Note on research and development, internal business processes were applied widely across all facets of a business and interpreted to also extend to the internal business processes of a client.

This is a positive change that will encourage businesses to invest in research and development. This means that any expenditure incurred in respect of research and development activities regardless of whether the end product/service will be sold will be eligible for the incentive. Furthermore, the expenditure incurred that relates to the following activities that were considered internal business processes may now qualify for the incentive:

• Computer software to enhance internal efficiencies;
• Development of software for internal use;
• Development of websites and internet sale systems for use by a taxpayer or a connected party in relation to that taxpayer;
• Software packages developed for administrative purposes, human resources and accounting purposes.

The proposed changes are welcomed because it makes research and development activities more attractive to taxpayers who want to improve internal business processes using innovation.

Authors:

Priscilla Letsoalo, Tax Consultant

23 February 2023