Since 2020, more and more companies in the mechanical and plant engineering sector have been using the government research allowance. The improved financing options, easier access to government funding for research and development (R&D) and flexibility in the use of funds are particularly appreciated. These are the findings of a study conducted by ZEW Mannheim and the VDMA. The study surveyed 300 companies in the German mechanical and plant engineering sector. Dr. Christian Rammer, author and deputy head of the ZEW Research Department: "The research allowance in mechanical and plant engineering motivates many companies to carry out additional R&D activities, strengthens market-oriented research and contributes to increasing competitiveness. Innovation economics and company dynamics". "The results show that the research allowance is an important instrument for securing growth even in difficult economic times. The research allowance has further potential to increase R&D expenditure in Germany and thus make an important contribution to achieving the government's target of 3.5 percent of gross domestic product."

Success story for mechanical and plant engineering

Hartmut Rauen, Deputy Managing Director of the VDMA

© VDMA e.V.

Between spring 2021 and January 2024, almost 1600 companies in the mechanical and plant engineering sector submitted a total of more than 4,500 projects for funding under the research grant scheme. This is 17.0% of all projects submitted in Germany, making the mechanical and plant engineering sector the leader among all industries. In 2023 alone, the number of users increased by almost 60%. This means that around 40% of all eligible companies in the sector have already submitted an application for a research grant. This potential is expected to be further exploited in 2024, as around a further fifth of companies are planning to submit an application. "The new instrument is becoming a success story in the mechanical and plant engineering sector," says Hartmut Rauen, Deputy Managing Director of the VDMA. "Fast, open, simple and reliable - these are the best arguments for using it."

Plannability is praised, bureaucracy could be improved

Dr. Ralph Wiechers, VDMA Chief Economist

© VDMA

The approval rate and thus the predictability for companies is much higher for research grants than for R&D project funding. In 2023, almost nine out of ten projects from the mechanical and plant engineering sector were approved or at least partially approved. Two thirds of the companies surveyed have also already received research allowance notices from the tax authorities. In almost all cases, the costs claimed were recognized. By the end of January 2024, the approved funding volume for mechanical and plant engineering amounted to around 130 million euros.

This means that the research allowance has entered a phase in which it has a direct impact on companies' R&D activities. However, around one in two companies had queries or requests for additional documentation from the tax office. Greater efforts should therefore be made to achieve lean, low-bureaucracy procedures in the area of tax administration. Dr. Ralph Wiechers, Chief Economist and Head of the VDMA's Tax Department, warns: "One of the great strengths of the research allowance is its low-bureaucracy procedure. But of course it ultimately depends on the tax authorities whether this legislative plan works in practice."

High potential of the Growth Opportunities Act

Companies currently receive a tax reduction of 25% on eligible expenditure for research and development (R&D) of up to 4 million euros per year. This results in a maximum subsidy of 1 million euros. In order to increase the effect of the research allowance, the Bundestag has decided on several changes in the Growth Opportunities Act. A planned increase in the upper limit to 10 million euros per year could mobilize significantly more R&D expenditure. "This will finally close the gap in innovation funding for larger SMEs," says Rauen. "In other words, the third of our value chain that is too large for SME funding programs and too small for many joint federal and EU projects." This is because many companies would then be able to claim their entire eligible R&D expenditure. If the measures envisaged in the Growth Opportunities Act were implemented, the amount of funding from the research allowance in mechanical and plant engineering could increase by around 60% compared to the current regulation to potentially almost 1.3 billion euros. "In view of widespread political reservations about an urgently needed reform of corporate taxation, the planned expansion of the research allowance would be a ray of hope! Because it ties in with a decisive lever for future growth - innovation," adds Dr. Wiechers.

You can download a summary of the study results here.