SARS now expecting detailed, substantive compliance with R&D legislation

Synopsis
The legislation permitting tax incentives for conducting R&D has been in force since November 2006. A (highly controversial) interpretation note on the matter was subsequently published by SARS in August 2009. However, until now, no substantive review of R&D tax incentive claims has been made by SARS.

In the final quarter of 2010, and for the first time, a number of taxpayers, from all description of industries, received lengthy questionnaires from SARS. These questionnaires demanded detailed, technical motivations and information to support the incentives that had been claimed.

Latest Development From SARS
SARS has now thrown down the gauntlet: the days are now over of taxpayers claiming lucrative R&D tax incentives without detailed, substantive supporting evidence. We have considered the SARS questionnaires and, on the whole, we believe these to be well-crafted, intelligent documents that are well-suited to assess meaningfully whether an R&D tax incentive claim is, in fact, valid.

Should Taxpayers Be Concerned By This Development?
Not at all: there is nothing sinister in the Revenue Service expecting compliance from those taxpayers who would claim the R&D tax incentives (or any other incentives, for that matter). Provided that a taxpayer has claimed the incentives validly and reasonably, we don't believe that there ought to be any undue cause for concern.

How Can Taxpayers Better Prepare For A Detailed Assessment By SARS?
Records, records, records! The success of any claim, for any income tax incentive, lies in the quality and (to a lesser extent) the quantity of the supporting records - the devil, truly, is in the detail. We expect that SARS will clamp down on those taxpayers that cannot substantiate a proper basis for claiming the lucrative incentives - and rightly so.


We believe that the ideal set of records to substantiate a claim for the R&D tax incentives should comprise suitable records relating to each of these aspects:

technical substantiation: a scientific & technological focus, demonstrating how the incentive claimed is based fairly on at least one of the defined
grounds of qualification;

financial substantiation: demonstrating how the value of the incentive claimed is both correct and reasonable, taking into account all potential
exclusions and limitations; and

legal substantiation: demonstrating how the peculiar requirements of the Income Tax Act are satisfied, and linking the technical and financial
substantiations.


It is very likely that, in the absence of records to support each of these aspects, a claim will be regarded as defective, and is likely to be rejected by SARS.

Future Developments?
It's too early to speculate how SARS will be dealing with the responses that it receives to its questionnaires. One thing is certain, however: the Revenue Service has shown, clearly, that it will no longer be accepting R&D tax incentive claims purely on face value. Taxpayers can expect to receive continued, and more rigorous, demands for detailed substantiation.

To date, none of the provisions of Section 11D have been tested in our courts. However, as our jurisprudence continues to mature, we fully expect that it will only be a matter of time before judicial pronouncements emerge. This, too, would be a very healthy development in our legislation.

For any assistance or further information, clients and colleagues are invited to contact us for further information.

Disclaimer
This article is not intended to be a comprehensive statement of the law, nor does it constitute an opinion or guarantee of any kind, and should not be construed as such. It should not be relied upon as a substitute for specific advice regarding particular scenarios. Margo Attorneys, Inc. cannot accept responsibility for the consequences of any person relying on the contents of this document for any other purpose.