IT companies are not making enough use of the funding potential

The IT industry is benefiting from the research share, according to a ZEW study published at the end of last year. Nevertheless, the industry still uses the funding instrument for innovation far too little, because there are many more innovative companies and the funding is very practical.

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The research allowance has been available as a new funding instrument since 2020. The number of applications is gradually increasing. The head of the Office for Certification of Research Grants (BSFZ), Andreas Hoffknecht, expects more than 10,000 this year. In total, there were just under 25,000 applications over four years up to mid-2024. So things are looking up – on the one hand. On the other hand, only about a tenth of innovative companies in Germany currently take this financial support for research and development true So there is a lot of untapped potential. The funding level is usually lower than traditional project funding from the federal and state governments. But the search portion is faster, less bureaucratic, tax-free and has lower content requirements. Unlike the unfortunately chosen term “research grant”, it is more about development than research.

This makes the instrument interesting not only for software developers, but also for digitization solutions that lead departments within their companies. The research grant is considered a good opportunity for the IT industry because companies that implement projects quickly with high personnel costs and do not want to wait long for a grant to be approved can get funding faster because the application has been be applied retroactively. This means that agile development projects will also benefit from the new tax instrument. Above all: The Research grant it does not depend on limited funding sources, such as the grant programs, and can be used for various company projects.

However, classic project financing retains its justification and usually has financial benefits. Only one funding can be claimed for the same costs, so companies need to plan strategically for which projects the current project funding makes sense and which research allocation.

The research allowance supports project-related personnel costs

The research allowance will support 25 percent of project-related personnel costs in research and development until March this year. In addition, development orders are effectively taken care of at 15 percent. The maximum funding per year is one million euro, which is offset against company tax or paid out if the tax burden is exceeded – for example in the case of start-ups or higher R&D costs . The funding can also be applied retroactively from 2020. However, the time for this is now very short. It is important that you do not miss the funding opportunities from 2021 onwards. The research allowance will certainly get an additional boost this year from the Opportunities for Growth Act. Since the end of March, funding for SMEs has increased to 35 percent of project-related personnel costs and 24.5 percent of R&D contract costs. The maximum share increases to 3.5 million euros per year, and for larger companies to 2.5 million euros.

Compared to classic project financing, the content and technical requirements are much lower because the latest level in the company is a benchmark. So new developments are enough for that company if there are technical risks. Experienced financing service providers increase the chances of success and scope of financing. They help identify which projects meet the necessary criteria for innovation, risk, design and replicability. The average number of permits is currently 70 per cent, and good advisers are achieving close to 100 per cent. As consultant-supported applications make up a high proportion at BSFZ, the chances of success for independent implementation appear to be closer to 50 percent. Another argument for good support based on experience is a 30 percent higher average funding amount.

In some cases, it may be worth applying for companies

The BSFZ has established a relatively simple and non-bureaucratic procedure for the first application step, which, however, is often characterized by additional requests and new applications. In practice, the second application step with the correct cost registration and billing for approval by the respective tax office is especially time-consuming and crucial. This license is always subject to a later audit, so that companies are still at risk of repayment, which must be avoided.

Experienced financing consultants now have experience with several thousand projects. Our practical experience shows that the requested share should be around 50,000 euros retroactively, i.e. R&D costs of 200,000 euros per year, so that the effort for implementation is worthwhile economic for the company. Due to the increase in the financing level for SMEs from 28 March 2024, this will be the case in the future in these cases from an average of 150,000 euros.

While the application and approval at the BSFZ is structured and takes place within three months, the inspection at many of the approximately 600 tax offices is still in its infancy and is very inconsistent. In addition, it can take several months to obtain a decision and ultimately achieve the additional liquidity by reducing fees. This should at least partially improve from 2025 through a possible credit against advance tax payments. In fact, according to the ZEW survey, two-fifths of companies cite internal R&D costs as the biggest challenge and another 27 percent cite communication with their tax office. Therefore companies with the support of external consultants should ensure that the service provider supports them not only in the first step of the technical application, but also in the implementation of accounting cost and proper documentation.