- By Justin Shein | Director, Catalyst Solutions
If SARS asked tomorrow how the expenditure in your Section 11D claim relates to the approved R&D project, what evidence would you be able to provide?
The R&D may have been undertaken and the costs incurred, but without a clear record connecting the technical work to the people, resources and expenditure involved, substantiating the claim becomes considerably more difficult.
While the DSTI application sets out the R&D project and the activities for which approval is sought, the work itself continues to develop as the project progresses. Records maintained during the R&D provide an account of what was actually undertaken. They support the compilation of annual DSTI progress reports, the preparation of the financial claim and, where required, substantiation of the deduction to SARS.
Much of the information needed is generated through the day-to-day management of technical projects and finances. Good record-keeping is about ensuring that relevant technical and financial information is captured, retained and can be linked back to the approved R&D activities when it is needed.
A Section 11D claim needs to be supported from both a technical and financial perspective. The approval identifies the qualifying R&D project, while the expenditure included in the tax deduction needs to be traceable to the work undertaken under that approval.
SARS retains audit oversight of the expenditure claimed and can assess whether the costs were incurred directly and solely in respect of the approved R&D. Clear project records provide the evidence needed to connect the R&D activities performed with the people, resources and expenditure included in the claim.
Project records should provide a clear account of the R&D undertaken and how the work developed over time. They should capture the scientific or technological uncertainty being addressed, the investigations or development work undertaken, and the results and technical findings that emerged.
Where the project changes direction, encounters unsuccessful approaches or opens new areas of investigation, the record should reflect that development. It should also identify who was involved in the R&D and when the relevant work took place.
The form of the evidence will depend on the nature of the R&D. What matters is that the records provide a consistent account of the work performed and its progression over the life of the project.
Technical records provide the supporting evidence behind the project history. Depending on the nature of the R&D, these may include:
No single type of document is required across every R&D project. The records retained should collectively show what technical work was undertaken, what was learned and how the project developed.
Financial records should provide a clear basis for the expenditure included in the Section 11D deduction and show how those costs relate to the approved R&D activities.
Relevant records may include:
The supporting financial information should allow the costs included in the claim to be traced back to the R&D work undertaken. Clear allocation methods and consistent project coding are particularly useful where employees, equipment or expenditure are shared across R&D and non-R&D activities.
R&D projects can change significantly as the work develops. Technical approaches may shift, testing can produce unexpected results and new areas of investigation may emerge.
Capturing this information at the time preserves the technical context behind key decisions, unsuccessful approaches, changes in direction and the work undertaken to resolve uncertainty.
It also supports DSTI progress reporting and makes it easier to align the technical work performed with the expenditure incurred during the same period. Maintaining the evidence as the project progresses reduces the amount of retrospective work required when progress reports and financial claims are prepared.
SARS requires supporting tax records to be retained for five years from the date the relevant tax return is submitted. Records may need to be kept for longer where an audit, investigation, objection or appeal remains in progress.
The technical and financial records supporting a Section 11D deduction should therefore be retained alongside the tax records for the relevant year of assessment and kept in a form that allows the basis of the claim to be substantiated if required.
R&D record-keeping is easier when the technical and financial information is organised around each approved project from the outset. A central project file can bring together significant technical developments, supporting documents, the people involved and the relevant expenditure as the work progresses.
The emphasis should be on consistency and traceability rather than volume. Technical evidence should be retained as it is generated, while relevant expenditure is tracked against the project and kept aligned with the approved activities.
Periodic review can identify missing information while the project detail is still current, rather than when a DSTI progress report or financial claim is being prepared.
Catalyst Solutions works with clients throughout the R&D claim process to identify the technical and financial information that should be captured and retained.
Regular engagement with the project team helps keep the evidence aligned with the approved R&D activities as the work develops, providing a clear basis for progress reporting, financial claim preparation and any supporting information later required by SARS.
If you are managing an active or planned R&D project and want to ensure the right technical and financial records are being captured from the outset, contact Catalyst Solutions to discuss your Section 11D R&D tax claim.
ABOUT THE AUTHOR
Justin Shein CA(SA) CFA is a director of Catalyst Solutions and leads the firm’s financial and reporting team. A Chartered Accountant and CFA, his focus is on maximising claim value while managing compliance and risk across every submission. Every cost in a claim Catalyst Solutions builds has been traced, tested, and supported by the technical analysis behind it.
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