Exploring the world of 11D tax incentives

Times of crisis create significant opportunities for companies prepared to tap into them. The COVID-19 pandemic is no exception, and has ignited critical innovation globally. Companies have been pushed to pivot, take bigger risks and move faster than ever before.

Dov Paluch, Managing Director at Catalyst Solutions, says a global economic downturn actually necessitates a greater focus on innovation. 

“Often, the first response by leaders in a downturn is to cut resources, curb spend, and halt long-term research projects, instead, shifting focus to short-term priorities.  But innovation is critical  for organizations to achieve their long-term strategic objectives.”

He says cash flow is critical in times of crisis, and aside from government financial assistance offered to businesses in response to the impact of COVID-19, tax incentives like the Section 11D Research and Development Incentive (R&D), provide a much-needed source of financial flexibility when other financing options become limited. 

Dov says thousands of companies are throwing away tens of millions of Rands a year because they don’t even realise they qualify for this benefit.  

“Most of the companies we speak to on a daily basis don’t believe the Section 11D incentive applies to them. In reality, the incentive is not just for scientists and technicians in white lab coats but covers a much broader range of activities.”

What is the 11D Incentive? 

The objective of the Section 11D Research and Development Incentive (R&D) is to help companies build capabilities to create new products, processes, devices and techniques, and/or significantly improve existing ones. 

The incentive allows for a supercharged tax deduction of 150% on qualifying R&D expenditure, which results in a cash(tax saving) benefit of 14% on qualifying expenditure. This means if a company spends R1 million on eligible R&D, its tax liability will be reduced by a significant R140 000. 

The incentive was introduced into the Income Tax Act in 2006 and has since been updated to require preapproval for the additional deduction. In order to qualify, a company needs to obtain pre-approval from the Department of Science and Innovation (DSI). The incentive is administered by the DSI along with SARS and the National Treasury.

Pre-approval is the biggest stumbling block many companies encounter. Many either do not submit their pre-approval application prior to significant spend, or alternatively, they do not have the technical and engineering expertise to adequately complete the application which is ultimately approved by a board of experts.

Examples of qualifying activities 

Some of the areas where we have been successful in recent times include software, agriculture, manufacturing and fintech. Ultimately, any entity involved in product or process development and improvements, scientific or technological designs, patentable work, activities involving testing and trial work, or software development, is potentially eligible. 

Qualifying for the incentive

In order to qualify for the incentive, the R&D must be done in South Africa and qualifying expenditure can include salaries, overheads, materials and contractor costs. Current legislation requires companies to pre-approve the R&D that is being done in order to claim the incentive. Only expenses incurred after the date of submitting the application can be included. This tax saving is also great in that it is not capped. It can therefore lead to substantial tax savings.

Costs that can be included 

Expenses incurred during basic and applied research as well as prototypes, labour costs of time spent on R&D,  materials and consumables as well as overheads directly attributable to the R&D are all potentially eligible. This list is not exhaustive, and numerous other costs may be eligible subject to certain provisos. 


During her tenure as CEO of global luxury fashion house Burberry, Angela Ahrendts said: “I was taught to never waste a good recession.”

Historically, economic downturns have presented unique opportunities for businesses to launch innovative new products and services. Uber, Air Bnb, Disney, Converse, Revlon, IBM, General Electric and Microsoft are among the world-leading companies established during a recession. 

“During a time when businesses are struggling to find the cash flow to stay afloat, South African companies should be considering ways of maximising tax efficiency. The Section 11D incentive can be a significant lever for businesses especially if your company is developing products and systems in response to the COVID-19 pandemic,” comments Dov. 

He however cautions that applying for the incentive can be cumbersome and difficult, which is why companies should seek assistance from professionals. 

“Catalyst has assisted companies in accessing more than R7 billion in grants and tax incentives.  Navigate the complexities of the 11D tax incentive with ease and work with a team with a proven track record in helping leading companies claim R&D tax.”

Visit www.catalystsolutions.co.za or Email: info@catalystsolutions.co.za for more information.

Leave a Reply

Your email address will not be published.