My client designs & develops computer software. A big portion of this is programs for the different SETA's. They would like to find out if they can claim a R&D allowance under section 11D?
Important:
This answer is based on tax law year ending 28 February 2019.
Answer:
For the purposes of this section “research and development” means “systematic investigative or systematic experimental activities of which the result is uncertain for the purpose of—
(b) creating or developing—
(iii) a computer program as defined in section 1 of the Copyright Act which is of an innovative nature; …”
“Provided that for the purposes of this definition, research and development does not include activities for the purpose of—
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…;
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development of internal business processes unless those internal business processes are mainly intended for sale or for granting the use or right of use or permission to use thereof to persons who are not connected persons in relation to the person carrying on that research and development; …”
The term, that is relevant to your request, is “development of internal business processes”.
The practice generally prevailing is that the exclusion, found in proviso (b) to section 11D(1), “is especially relevant to the inclusion of software as an R&D purpose (see 4.2.4). Accordingly the following software-related activities, whether or not they are of a routine nature, do not qualify for the deduction:
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Support for existing systems.
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Business application software.”
SARS states that the “purpose of the programs therefore is to enhance a client’s management of its assets and/or its internal business processes involving the optimal use of its resources.” And also that “software packages developed for administration, human resources or accounting purposes are similarly excluded from the tax-incentive scheme as they constitute management or internal business processes.”
In Case No: IT13541 SARS argued that the expenditure is not deductible in terms of section 11D(1) of the Act because the “purpose of the programs therefore is to enhance a client’s management of its assets and/or its internal business processes involving the optimal use of its resources.” At the time section 11(5) referred to “management or internal business processes”.
The crucial question in this appeal was “whether the expenditure incurred by the Appellant as contemplated in section 11D(1)(b)(iii) is precluded by section 11D(5)(b) because it related to management or internal business processes.”
Judge Ndita, in Case No: IT13541, said the following:
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It must be accepted that the legislature sought to incentivise the development of innovative computer programs, but not where these relate inter alia to ‘management or internal business processes’.
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The Act contains no definition of the phrase ‘expenditure relating to management and internal processes’. That being the case, the words in the phrase must be given their ordinary meaning, unless such a meaning is contrary to the intention of the legislature.
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New Oxford Dictionary of English defines ‘management’ to mean:
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‘the process of dealing with or controlling things or people’. ‘Process’ is defined as ‘a series of actions or steps taken in order to achieve a particular end’. There is no dispute between the parties with regard to the above definitions. What is of significance in my view is the meaning of the words ‘expenditure . . . relating to’. The New Oxford Dictionary of English defines the verb ‘relate’ to mean:
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‘make or show a connection between’.
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It defines the noun ‘relation’ to mean:
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‘the way in which two or more people or things are connected; a thing’s effect on or relevance to another’. It follows that what is prohibited is expenditure ‘which is connected with’ the items listed in 11D(5) as provided in paragraphs (a) to (e).
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In my view, a proper interpretation is to be found in the words ‘expenditure … relating to’. To my mind this make sense because what is prohibited is the expenditure ‘which is connected with’ any of the items listed in paragraphs (a) to (e) thereof.
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Therefore ‘the expenditure . . . relating to management or internal business processes’ can only refer to expenditure which is connected with management or internal business processes in the sense of the use for which the computer program was developed.
We submit that is therefore not limited to “programmes are not used for administration or accounting”.