The launch more than four years ago was somewhat bumpy, which was partly due to the term "research allowance", as almost everyone involved notes. This is because, compared to traditional project funding, new product developments are often enough for the company in question to benefit from the funding - the content requirements are therefore lower. In a nutshell, the research allowance is faster and less bureaucratic and has fewer requirements in terms of content, but also provides a comparatively lower percentage of funding. Companies must therefore plan strategically for which projects the previous project funding makes sense and for which the research allowance is an option.

Companies that want to implement projects quickly with high personnel costs and do not want to wait long for a grant to be approved can receive funding more quickly. This means that development projects in particular, which are necessary for the digitalization of the economy, can benefit from this tax instrument.

This is well received by companies: Last year, more than 8,000 applications were submitted to the Certification Office for Research Grants (BSFZ). This year, it will be more than 10,000, according to the forecast of BSFZ director Andreas Hoffknecht. With 17% of all applications, the mechanical and plant engineering sector is making the most use of this funding, which was launched at the beginning of 2020. A ZEW study from March of this year for the VDMA shows that the number of users from this sector has increased by 60% in the past year alone. Examples from the mechanical engineering sector include AI projects from precision mechanics company EZU and projects such as "Digital Twin" from simulation technology company ISG.

More support for innovative projects

The research allowance should receive an additional boost from the Growth Opportunities Act. Since March 28, SMEs have even been able to receive 35% of project-related personnel costs and 24.5% of R&D contract costs, compared to 25% and 15% in previous years. In addition, the maximum allowance per year for SMEs has been increased from one to 3.5 million euros. For large companies, the allowance increases from one to 2.5 million euros. This is relevant for German SMEs, as just under four-fifths of the companies applying currently have fewer than 250 employees. For Michael Zahm, Chairman of the German Association for Technology Transfer and Innovation (DTI), which brings together private and public consultancy institutions, this is the key improvement to the Research Allowance Act: "SMEs in particular, which are investing a lot of money in their future existence, will receive more support for innovative projects in future and thus for securing their location. The practical implementation of the allowance is currently still problematic due to the often lacking experience and processing capacity of the tax offices as well as the sometimes differing procedures for checking and determining the annual allowances."

AI tools to help with the application process

"In order to be certified as eligible for funding, the projects must fulfill the three criteria of novelty, risk and planning in equal measure. This is the case for around 75% of applications," says Hoffknecht. Reasons for rejection are usually a lack of research and development risk or a lack of novelty. "Basically, we want to make it as easy as possible for companies so that they can manage without external advice," says the doctor of physics. To this end, the BSFZ plans to develop AI tools this year that will make the application process even easier. However, according to the ZEW study, 60% of mechanical engineers are supported by professional consultants. "In this first phase of the research grant, many companies have obviously also come across the new funding opportunity through the cold calling of consultants," explains Deputy BSFZ Director Thomas Matigat. With the prospect of unexpected additional funds for their research and development without having to worry about bureaucratic details, some companies are probably signing unfavorable contracts. For example, the fee may be linked to the allowance amount estimated in the BSFZ certificate.

However, the decisive factor for entrepreneurs and managing directors is ultimately which personnel costs and expenses the respective tax office ultimately recognizes after the actual annual cost settlement. This is because companies must be able to document and prove these expenses - also retroactively. "While the application for the project at the certification office is simple and straightforward for companies to manage, support from consultants can be very helpful in preparing evidence for the tax office," says Matigat.

Documentation and tax pitfalls

According to Michael Zahm, who is also the managing partner of PFIF, a consulting firm specializing in innovation funding, this is where companies run into pitfalls: "We support our clients with this documentation and have built up extra experience for this purpose. Under professional law, tax consultants are supposed to handle the accounting of the allowance, but they have no experience or capacity to actually provide support in the correct recording and accounting of costs in research and development. As a result, companies are often faced with uncertainty when dealing with an official from one of the 600 or so tax offices, sometimes with a different approach to accounting. As a result, many certificates are currently still awaiting the settlement of claims that have already been technically approved. In fact, two-fifths of mechanical engineering companies cite the documentation of internal R&D costs as the biggest challenge and a further 27% cite communication with their tax office. "We now have the experience of 2500 projects in fulfilling FC requirements and a success rate of 97%," says the 60-year-old engineer. This also applies to help with internal cost recording in the projects.

Earlier profitability due to higher funding rate

The author: Jens Gieseler is a freelance journalist in Tübingen specializing in personnel and management.

© Jens Gieseler

According to the ZEW study, a third of applications currently fall below an approval amount of 50,000 euros. For Zahm as an expert, this is a threshold value, because despite all efforts to simplify the process, applications, documentation and communication with tax consultants and the tax office cost time and human resources, regardless of whether with or without a consultant. The increase in the funding rate for SMEs may lead to an earlier return on investment in the future. A further third of the approved funds are between 100,000 and 250,000 euros. And nine percent are over half a million euros. SMEs in particular are dependent on funding in order to be able to develop more innovative products. For example, 64% of industrial companies state that they use their funds more for market-oriented R&D and 59% (multiple answers possible) for new product and service offerings. As of January 2024, after mechanical engineering (4507 applications), the IT sector (4270 applications), electrical and measurement technology (1733) and the chemical industry (1554) made the greatest use of the research allowance. There is therefore still room for improvement in many sectors if the billing process can be established more reliably.