Companies missing out on R&D billions

There are a number of incentives on offer from government for companies involved in technology research and development, including software development, but few are taking advantage of them. By Duncan McLeod.

The department of science & technology has had a tax incentive programme in place since 2007. It’s meant to encourage research and development (R&D), but few companies are aware of it and are losing billions of rand in tax rebates in the process.

Dov Paluch, MD of Catalyst Solutions, a company that specialises in assisting companies to get access to grants and tax incentives on offer from government, says only a tiny proportion of the eligible R&D being done by SA companies is being claimed back from the taxman under the programme.

He explains that the department of science & technology established a 10-year innovation plan in 2008 in an effort to move SA to a knowledge-based economy with a strong focus on driving up investment in R&D.

The tax incentive was created under this plan and allows companies investing in qualifying R&D to claim a 150% tax deduction instead of the normal 100%. This effectively works out to a cash benefit of 14%, so for every R1m a company spends on R&D, it is entitled to claim R140 000 from government. But the incentives were not well publicised and uptake has been poor, Paluch says.

In the department of science & technology’s most recent annual report, for the 2009/10 financial year, it says it received only 116 applications related to R1,2bn in R&D spend. “Only a tiny percentage of R&D in SA is being channelled through this incentive,” Paluch says.

He says there are a number of reasons why it hasn’t worked well. For one thing, the incentive has been poorly publicised and as a result many companies don’t know about it. For another, there are “grey areas” in the legislation that make it difficult to interpret.

The incentive is available to any company that is developing anything that is of a scientific or technological nature that is innovative. This includes software, except for software developed for management or internal business processes. Ironically, this disqualifies companies developing accounting software for third parties, for example. “The SA Revenue Service has been interpreting that exclusion very broadly,” Paluch says.

The good news, he says, is that the legislation is being amended to encourage more companies to take advantage of the incentive. The amendments, to the Income Tax Act, will come into force in October.

“The objective is to increase the number of companies doing R&D and to increase R&D in the companies already doing it,” Paluch says. “They’ve broadened the legislation to be more in line with international standards and updated the definition of what amounts to qualifying R&D. Financial institutions, which couldn’t benefit from the incentive, will now also be able to and software exclusion has been removed to the extent a company is developing software for someone else, which is a huge bonus for the software industry.”

However, under the legislative amendments, companies now have to go through a preapproval process before they can make claims. An assessment will be conducted by the department of science & technology and only once approval has been granted may companies then make the necessary claims from the SA Revenue Service. “This adds to the burden on companies doing R&D and raises challenges,” Paluch says. “Do companies want to divulge their intellectual property? Also, R&D is often very dynamic. Often companies have to innovate on the spur of the moment rather than waiting for preapprovals from government.”

The claims that companies can make against their R&D investments are not capped monetarily.

The R&D tax incentive is not the only incentive programme offered by government, Paluch says. The department of trade & industry, through the Industrial Development Corp, offers a support programme for industrial innovation. This offers companies up to R5m for medium-sized firms, and R2m for small companies, for investments related to technological innovation. It’s a matching scheme, so the IDC offers at least 50% of the planned spend — higher if the start-up has strong empowerment credentials. The money is provided upfront in the form of a pure grant.

It’s not easy to get access to the funds, though. “There is a lot of paperwork and you have to go through a due diligence,” Paluch says. “There are also restrictions applied to your intellectual property.

On the positive side, the rigours of applying for a grant helps start-ups focus on getting their affairs in order early on. “It puts structure into young companies.”  — (c) 2012 NewsCentral Media