INTELLECTUAL property specialists have criticised government’s research and development (R&D) tax incentive introduced three years ago, as too difficult and costly for entrepreneurs, this as a cabinet official revealed that fewer than 100 businesses had benefited from the incentive.
A government official who sits on cabinet meetings and who asked not to be named, told Bignews that the scheme had “not been widely taken up” and that “only 82” businesses had benefited from the R&D tax incentive which was the launched by the Department of Science and Technology in 2006.
The department adopted the tax incentive in line with an increasing number of countries that are using such incentives to boost their R&D rates.
The department’s ministerial spokesperson, Lunga Ngqengelele told Bignews that the it had presented a document to cabinet containing the number of businesses that have benefited from the incentive, but added that it would only comment after the cabinet had made this information public that we will be able to comment.
Government’s spokesperson, Themba Maseko was unaware of the document and said it had not yet appeared before the cabinet.
Anthony van Zantwijk, a patent attorney from Sibanda & Zantwijk, said it was difficult for entrepreneurs to qualify for the incentive and added that many were put
off by the necessary assessments that one had to carry out to ensure one could qualify for the tax incentive.
Van Zantwijk, whose firm assisted the National Treasury to bring out an interpretation guide on the incentive, said the only businesses that had claimed for the incentive were big companies that already conducted a lot of R&D.
An audit on R&D can cost R50 000 or R60 000 for a small firm, according to Anton Kriel, a tax consultant for BDO Spencer Steward.
From the outside the incentive appears to be very attractive. An entrepreneur can claim 150% of non-capital R&D expenses for tax purposes per year and write off 100% of capital R&D expenses over three years – at 50% of the cost in year one and 30% and 20% to be written off in the succeeding two years.
There is no application process for the incentive. One simply completes a form available from the department’s website before deducting R&D costs on ones tax return.
Yet the risk is that the Receiver may come back later to inform you that you don’t qualify. You will then have to pay back the entire amount you spent on R&D and the Receiver may also opt to add interest and penalties. This can be a costly exercise, making an assessment necessary.
But points out Van Zantwijk: “Not only do you have to do an audit, but you don’t know whether you will qualify”.
On top of this by claiming for a deduction under the incentive one would naturally draw the SA Revenue Service’s (Sars) attention, which would scrutinise your tax return more closely, said Van Zantwijk, who has previously worked for Sars.
When it comes down to it, the incentive essentially translates to a close corporation or company receiving a R140 000 cash pay out for every R1 million it spends on R&D (rather than having to pay R280 000 in tax). Because of this Van Zantwijk said a business had to spend quite a few million rand on R&D to make it worthwhile to claim under the incentive.
Kriel pointed out that another draw back was that one could only benefit from the incentive if the innovation one was developing was totally new or patentable.
This made the incentive “very challenging” for many entrepreneurs that simply adapted innovations from overseas for South Africa, he said.
Innovators that developed computer programs to fulfil certain internal processes – like HR or payroll – for their own business, could also not benefit from the incentive.
Kriel said he had only assisted a single business to put in an application for the tax incentive. The business was claiming for research and development costs and was running a laboratory and carrying out research into specialised foodstuffs.
Darren Margo, a patent attorney from Margo IP, agreed that the assessments had put off many entrepreneurs and advised most business owners to think carefully about whether they should take up the incentive if they spent less than R2 million a year on R&D.
However he believed the grant had helped set up “many” factories in South Africa and had helped increase spend on R&D – from around 0,5% in 2006 to just over 1% this year.
He said he had been involved with assisting “20 to 30” companies that had claimed for the R&D incentive – in areas ranging from defence to software and pharmaceuticals – but admitted that all of these were large businesses, or small firms owned by large companies.
This article appeared in Business Day on 20 October 2009.
Stephen Timm is a