Small businesses should be given more favourable tax treatment to encourage more to use a research and development (R&D) tax incentive, says a task team in South Africa.
The task team, which was set up by Minister of Science and Technology Naledi Pandor (pictured above) in October last year to look at ways of improving the R&D tax incentive. The task team's report was released to the public last month.
SME tax credit
The task team said the Department of Science and Technology should look into offering small businesses that apply for the R&D tax incentive (which has been in existence since 2006), a refundable tax credit (which unlike a non-refundable tax credit, is able to reduce a company's tax balance beyond zero).
The task team said a number of countries provide special treatment to SMEs investing in R&D. It said Australia, France, Canada, Singapore and the UK recognise the limited cash flows and tax liabilities of SMEs and thus allow SMEs a refundable tax credit, while only offering large companies a non-refundable or carry-over tax credit.
The report however says although it appears that the support provided to SMEs in South Africa is low, results from cross-country comparisons should be interpreted with care.
SMEs are taxed under a special regime in South Africa, using graduated rates and additional support is also provided to SMEs via direct instruments such as grants (such as the Support Programme for Industrial Innovation) provided by other government departments.
Review pre-approval system
In addition the task team has recommended that the department look at changing the system of approval of projects as the current pre-approval process has led to bureaucratic delays and put off smaller businesses from applying to the incentive (see this earlier post).
The tax team said in its report that R&D tax deductions peaked at R1.2 billion in 2010/11, but decreased by 70% in 2012/13, and 38% in 2013/14 over 2010/2011. This, while the number of applicants in the programme declined from a peak of 305 applications in October 2012 to 221 in 2014/15.
It attributed the decrease to administrative delays and backlogs associated with the department moving from a retrospective system to a pre-approval system in October 2012.
In the past companies simply went ahead with research and applied for to write off the costs it spent on these. Under the pre-approval system a company had to first seek approval on whether a tax deduction could be claimed before proceeding with any research.
In 2015, 28 of the 34 OECD members had preferential tax treatment to R&D spending businesses. Most of these use the retrospective system.
The task team has recommended that the department immediately simplify and improve administrative processes and that it review the pre-approval system with the possibility of returning to a more refined retrospective method.
When it comes to the total direct and indirect government funding of businesses to carry out R&D as a percentage of GDP, the report says South Africa, with a contribution 0.05%, is among the bottom countries. South Korea and Russia, with figures above 0.4% top the list.
Fixing the R&D tax incentive so that it attracts more SMEs will therefore be crucial.
Timm is a South African who writes on small business. Click here to sign up for the monthly Small Business Insight newsletter.
Stephen Timm is a