How can the research allowance get better?
How can the research allowance get better?
Accompanying comments on the DIHK short survey of September 6, 2022.
A recently published survey by the Association of German Chambers of Industry and Commerce (DIHK) provides revealing insights into how companies perceive the research allowance [1] – namely as bureaucratic, non-transparent with regard to eligible costs, and not very attractive compared to project funding. Reason enough for ARTTIC Innovation, two years after the launch of tax incentives for research and development (R&D) in Germany (see Forschungszulagengesetz, FZulG [2]), to evaluate from the perspective of innovation and funding consulting whether the current design of the instrument fits the envisioned role in the midst of the funding landscape. Are there aspects whose reform would help fill the role better, or can we even think of other ambitions for the research allowance?
1. Advantages of the isntrument and influence on the function of the R&D allowance
To answer how the research allowance can get better, it is worth looking at the positive aspects at the beginning. Unique selling points to be highlighted would be:
- Retroactive funding (from 1/1/2020)
- Funding of aborted projects
- Compact technical application in phase 1 (in relation to the potential yield)
Furthermore, in our practice we could see that companies consider the following characteristics to be advantageous in their decision for the research allowance:
- Topical openness (no programmatic specifications)
- Funding of contract research (when internal competencies are lacking)
- Core data of the project can still be adjusted after application (project costs, project progress, project result)
The combination of the aforementioned unique selling points and advantages forms the individual character of the research allowance: Easily realized flexibility. Moreover, this option is available to any company, regardless of size.
The general objective in introducing the research allowance was to strengthen R&D in Germany by establishing a complementary mechanism of subsidizing labour costs. The strategic idea here was to promote the expansion of R&D activities by freeing up funds through a legal entitlement to funding for project-related activities, which can then be earmarked for other expenditures – preferably R&D.
The research allowance could indeed fulfill this role, and the DIHK survey also shows that “cost reduction for R&D projects” as well as “expansion of in-house R&D” are among the top 3 beneficial expectations for the research allowance. However, day-to-day use of the research allowance has shown, especially in companies that do not have explicit R&D departments, that personnel are withdrawn from R&D activities supported by the research allowance as soon as more lucrative day-to-day business beckons! The situation is different for companies with designated R&D departments. Here, the projects are generally driven forward with the planned deployment. However, we cannot yet confirm that research allowance disbursements would have a beneficial effect on the budgeting of research departments. Here, the problem of delayed call-off at the tax offices and thus decoupling may lead to a lower, but in any case delayed, perception of this specific cost reduction.
The strategic function cannot yet be conclusively assessed, but may be strengthened at an early stage (see our proposals under 3.). But it is perhaps another peculiarity, which is why the research allowance will hold its own in the end, and is also already fully realized: Complete openness to the object of research and development. This translates directly into Strengthening entrepreneurial sovereignty. Companies can decide for themselves what their focus should be. As long as they set themselves the goal of developing a product, process or service that goes beyond the state of the art and whose implementation involves inherent technical risks (see FRASCATI criteria [3]). The research allowance frees companies without leaving them alone.
2. DISADVANTAGES OF THE INSTRUMENT AND INFLUENCE ON THE FUNCTION OF THE R&D ALLOWANCE
Despite the benefits we have enumerated, there are factors that make it unattractive to obtain the research allowance as a grant. These include the following general points:
- Relatively low funding rate (compared to other funding programs)
- Undifferentiated funding rate (without regard to region or company age)
- Indeterminability of eligible activities
In addition, there are procedural aspects that cause headaches in practice either in the first (BSFZ) or second phase (ELSTER) of the application:
- Much initial effort for business statistics at BSFZ (extension to 3 marketing years was not helpful).
- Increasing practice of BSFZs to issue rejections directly without follow-up requests (thus requiring resubmission).
- Division of the assessment limit per fiscal year in the case of affiliated companies, which has proven to be downright impossible, especially in the case of large companies
- Relative complexity of the ELSTER application for research allowance
- Uncertainty about possible subsequent revocation by tax office
Here, too, our impression largely coincides with the business perspective of the DIHK survey: two-thirds of the companies surveyed rate the application process as “bureaucratic” or “very bureaucratic”. Surprisingly, there is no strong differentiation between phase 1 (BSFZ) and phase 2 (tax office). The top 3 reasons for not using it also included “… uncertainty about eligibility …” and “project funding is more attractive to our company.” This is concerning in that the third most important expectation was “easier than traditional project funding.” On this front, the research allowance does not live up to its intended function.
3. SUGGESTIONS FOR IMPROVEMENT OF THE R&D ALLOWANCE
The benefits of the instrument have been little to no communicated by the federal government. Here, the marketing can be clearly improved. Especially against the background of the application freeze for the Central Innovation Program for SMEs – as also emphasized in the DIHK publication – it should be emphasized more clearly that a decision by the BSFZ represents a legal entitlement, regardless of the amount of available budget funds. Eligibility in terms of research allowance is a timeless and fixed criterion. An issued notice is and remains valid.
The identified disadvantages offer more potential for improvement. Keeping these in mind and following a user-centered approach, the ideal research grant is as follows: a grant of significant size that is easy to apply for, is paid in part or in full in a timely manner, may provide more incentives to certain companies, and is not much work overall. What would need to be done to achieve this?
- Significant level: Moderate increase in the rate for personnel costs or inclusion of material costs in the assessment ceiling.
- Prompt payment: Enabling start-up financing by directly advancing the expected research allowance for the current business year for all certified projects to companies with a notice from the BSFZ. This would require a minimum application via ELSTER. Offsetting against the eligible costs actually incurred is then carried out in the classic manner via the previous ELSTER application after the end of a fiscal year.
- Modifications: As the amount of personnel costs increases, so does the amount of the research allowance. This puts small and medium-sized companies at a disadvantage and, via the distribution of R&D-strong companies in Germany, the structurally weak federal states. Therefore, we propose the abolition of individual effort calculation and the introduction of a flat hourly rate (also in line with the companies’ demand in the free text of the DIHK survey). We propose to set this at 40 €/h. This is not just a classic median hourly rate in mixed R&D teams. This rate would have the advantage that it is in part much higher than the hourly rates in, for example, eastern German counties. We also propose that for simplicity, all companies can apply with this rate in both phases, but companies that pay higher hourly rates can use them as a basis for funding in the 2nd phase as before.
- Formal facilitations: There would be many details that would already have a great impact. This includes the waiver of business statistics in the 1st phase, a better distribution of incoming applications within the BSFZ consortium (processing times vary greatly between the consortium’s sponsors), the simplification of hourly documentation (week-based instead of day-based, is also in line with GoBD), a streamlining of the 2nd part of the ELSTER application in the 2nd phase (number of hours worked would suffice with hourly flat rate) and generally comprehensible justifications in the notice from the tax office as to why research contracts deemed eligible by the BSFZ are sometimes not taken into account. A waiver of the obligation to register with an ELSTER certificate in the 1st phase would also be uncritical as long as the company is in the 2nd phase must identify digitally.
Conclusion
The research allowance certainly should not and cannot replace direct project funding, but at present it cannot even seriously compete with it and is consistently disregarded as a supplement. It would certainly be beneficial if some of the suggestions presented were addressed in the next amendment of the instrument. ARTTIC Innovation will continue to follow the development of the research allowance and all interested companies.
Dr. Daniel Pawliczek
Funding Consultant at ARTTIC Innovation
Sources:
[1] *DIHK evaluation Mastering crises with innovations for fiscal research promotion
[2] FZulG – Law on tax incentives for research and development (gesetze-im-internet.de)
[3] Frascati Manual 2015 | READ online (oecd-ilibrary.org)
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