Steinbeis experts offer guidance on different funding options
With the introduction of the steuerliche Forschungszulage, or tax allowance for research, the Federal Ministry of Finance has also established a new funding system. This research allowance has little in common with the project funding program, which falls under the government’s high-tech strategy (HTS). The changes affect everything from eligibility requirements to the application process, calculating eligible costs, and involvement of the tax authorities. Because of these differences, even experts are finding it difficult to compare the different funding options. As a result, there is growing uncertainty among people responsible for making such decisions at companies. The Steinbeis Consulting Center for Technology Promotion & Project Financing is providing companies with support in identifying the appropriate funding.
To provide their clients with professional advice, the Steinbeis experts first mapped the differences between the two systems and used examples of typical calculations to assess the financial impacts of the funding options. This allowed them to derive recommendations for planning the subsidy process.
Systemic differences between the research allowance and project funding
Companies trying to decide if they should apply for a research allowance or project funding are advised to take into account the differences between submission deadlines, the topics that are funded, funding levels, the maximum level of funding, and more.
The way the tax incentives for research have been designed reflects the German government’s goal of boosting investment in research and development across the board. Bureaucracy is kept to a minimum and the funding conditions are designed to be flexible. The main advantages are:
- The research allowance is flexible – applications can be submitted before embarking on a project, during the project, or retrospectively after project completion
- Unlike project funding, up to 100% of R&D projects can be outsourced under the research allowance (contractual research)
- The research allowance does not involve much bureaucracy, neither during the application process nor when providing evidence
- Innovation requirements are lower for the research allowance than for project funding
The main disadvantage of the research allowance is the lower funding rate of 25%. But does the higher level of funding for the project program compensate for the additional time and effort invested in bureaucracy?
Project funding remains the gold standard
To assess the cost-effectiveness of the two options – research allowance or project funding – the Steinbeis experts have taken into account the most relevant influencing factors and made a comparative calculation to provide guidance for companies affected by the new program. Results may differ in individual cases. Their comparison of the different subsidy systems is based on the following assumptions:
- Joint R&D projects at large companies
- To simplify things, the calculation is based on one employee plus pro rata direct costs (material costs, travel)
- Timing considerations for labor costs:
- With project funding, max. 82% of annual working time
- With the research allowance, up to 100% of annual working time
- Due to the elaborate application process for project funding, 15% of direct costs have been calculated in as ineligible upfront costs
- For the research allowance, only 5% of upfront costs have been taken into account, because it is possible to start projects earlier and parts of the planning phase are also eligible for funding
- The direct costs for R&D projects were used as a basis for the comparison, adjusted for taxes on profits
The comparison highlights differences in the approaches when it comes to eligible costs and subsidy rates. The Steinbeis experts assume that the proportion of funding offered under the project funding program covers more than 50% of the direct costs of an R&D project. “This means that the project funding option generates more than twice the level of support of the research allowance. Project funding thus remains the gold standard for ambitious development projects,” says Helmut Haimerl, Steinbeis Entrepreneur at the Steinbeis Consulting Center for Technology Promotion & Project Financing.
Compared to project funding, the research tax subsidy is subject to lower requirements when it comes to the degree of innovation. The approval rate of over 80% communicated by the certification office shows that many development projects do not meet the strict requirements of project funding, but do meet the requirements of research funding.
Optimizing funding claims thanks to systematic subsidy management
Because the approval rates for project funding are much lower, the likelihood of receiving support should be investigated in advance and, based on this, decisions will need to be made regarding the appropriate funding option for the project in question. Nonetheless, the Steinbeis experts have noticed from their own consulting projects that decisions regarding applications are often made on an ad hoc basis without systematic checking. As a result, they recommend that clients adopt a systematic approach to the funding process.
Such systematic approaches to funding management allow companies to continuously check the eligibility of all development projects to receive funding. Structuring the funding process also allows firms to avoid costly one-off applications. Having more reliable systems makes workflows more efficient and improves success rates. Employees no longer see funding applications as a burden or chore. It has also been proven that subsidies improve budgets for individual development projects, thus encouraging people to set more ambitious project targets.
Helmut Haimerl (author)
Steinbeis Consulting Center: Technology Promotion & Project Financing (München)