FP7 news - issue 2
July 2011
Welcome
Welcome to our regular FP7 newsletter. In this issue, we focus on the simplification of FP7 rules and ask “do they really work?”
It is certainly the case that there will be more flexibility for the many major corporates whose normal accounting methodology is based on average personnel costing systems to claim these rates for reimbursement. However, the use of the productive hours denominator is, we believe, likely to prove problematic.
It should also be remembered that the new owner-manager rules apply not only to owner-managers themselves, but to anyone in a business who does not receive a salary or is not remunerated on a regular basis. Does this mean that it is not possible to claim any level of personnel cost for the individuals concerned; neither by use of the Marie Curie flat rate, nor by reference to the level of drawings made? This is a definite grey area still.
Based on our past experience, we believe there is clearly a risk of different interpretations and applications by different Commission auditors – at least to start with.
With FP7 ending in 2013, the EC launched a Green Paper in February to publicly debate key issues to be taken into account for future EU research and innovation funding programmes. Although it focused on what we now know will be called ‘Horizon 2020', the successor programme to FP7, the Green Paper went much further.
EC announces major simplification of RTD FP7 programme rules…but do they work?
In January 2011, the Commission finally adopted a number of measures aimed at bringing simplification to rules and regulations underpinning the FP7 programme and thus “to cut red tape for researchers and SMEs”.
The announcement was the culmination of a lengthy process of dialogue with the research community and internally and builds upon the communication published in June 2010 entitled “Simplifying the Implementation of the Research Framework Programmes”.
The measures now adopted for FP7 do not encompass all that was elaborated on in the earlier communication. Some are to be discussed further looking ahead to FP8 and beyond. Others, such as the issue of whether project “co-ordinators” should have to account for any pre-financing interest earned have been dropped.
The three core areas of “simplification” proposed are:
- Allowing more flexibility in how personnel costs are calculated so that EU research grant-holders can apply their usual accounting methods when requesting reimbursement for average personnel costs. They will no longer need to set up entire parallel accounting systems just for this purpose;
- SME owners whose salaries are not formally registered in their accounts can now be reimbursed, through flat-rate payments, for their contribution to work on research projects.
- A new steering group of senior officials from all the Commission departments and agencies involved will remove inconsistencies in the application of the rules on research funding.
At first glance, all looks good for the research community in general. What about after a closer inspection?
The case of average personnel costs
It is certainly the case that in terms of average personnel costing systems, there will now be much less burden and frustration on the part of many major corporates which have had to endure endless discussions about whether their respective systems produce “significant deviations” from the actual individual research costs of those personnel who have worked on any given project. The Commission's auditors will, at this level, now only have to asses whether:
- The system really is based on actual personnel costs
- The elements of cost included meet the eligibility criteria as set out in the relevant contract
- The system is indeed being applied in line with the “usual accounting practice” of the beneficiary and that the Commission is not being disadvantaged in any way.
This approach will be retrospectively applied to the start of FP7.
Beneficiaries can still prepare Certificates of Methodology (CoMav) related to their average personnel costing system as this option offers beneficiaries the possibility of obtaining prior assurance on the compatibility of their methodology with FP7 rules.
Most commentators on this change believe it can only be a good thing; however, we are not so sure. One area of possible difficulty is that of the determination and application of the productive hours' denominator. Article 1 (4) of the January Communication states: “The number of productive hours used to calculate the average hourly rates shall correspond to the usual management practice of the beneficiary provided that it reflects the actual working standards of the beneficiary, in compliance with applicable national legislation, collective labour agreements and contracts and that it is based on auditable data”.
This may all look very innocent and no different from before. In principle, it is; it all depends on the level and rigour of scrutiny that will now be applied in this area. In the case of average costing systems, the denominator will most definitely be some form of standard or composite for the relevant pool of resources upon which the average is then calculated.
Productive hours has long been a bone of contention between the Commission and its beneficiaries. The Commission's view has always been that “productive” equates to “available working time” after making allowances for contractual and other legal deductions such as vacation time, national holidays and statutory work time maximums (eg 35 hours per week).
Much more contentious has been when organisations claim allowance for general training and development, internal management meetings and similar activities. It is not impossible to claim some allowance here; but the test threshold is high and often difficult to demonstrate practically.
Many beneficiaries use as their denominator the available “chargeable”, “billable” or “saleable” hours. These levels are calculated after making often sizeable deductions for administrative or other non-productive tasks. However, it is often debatable whether the deductions are really necessary in the context of the FP7 funded project. The decision to allow, for example, high training and professional development time allowances is an elective one by the beneficiary and does not necessarily have any direct link to the FP7 funded project.
We do not believe this attitude is going to change. To simply claim that 1,000 hours is your usual productive hours' denominator, whether using average costs or not, is not going to be accepted without rigorous scrutiny and assessment by the Commission and their appointed auditors.
In an average costing scenario, the auditor will also need to look at what actually happens in reality to assess whether the denominator used really fits the actual working pattern of the same individuals who worked on any given FP7 funded project.
Owner-manager time costs
At the very outset, it should be remembered that the new rules apply not only to the owner-managers themselves, but anyone in any business who does not receive a salary or is not remunerated on a regular basis. Thus, if other family members are engaged in the business and do not receive any regular salary, and they provide relevant technical input to the project, then a claim for their time costs based on the applicable Marie Curie rates can be applied.
It is also worth mentioning that the Marie Curie rates are based on a theoretical annual productive hours total of 1,575. If any person works less than that on a project, you can only claim a proportionate amount.
However, if you work 1,575, you cannot claim proportionately more. The Marie Curie daily rate is a fixed ceiling.
What does this mean in the case of an unincorporated business or partnership, where the income received is not in the form of a salary but considered “drawings” on account of profits earned? Profits are considered ineligible costs, tantamount to a return on capital. Does this mean that in such a circumstance it is not possible to claim any level of personnel cost for the individuals concerned; neither by use of the Marie Curie flat rate, nor by reference to the level of drawings made?
This is a definite grey area still. It could be argued that as no salary is paid, the determination is by reference to Marie Curie fee rates. On the other hand, the view could be taken (assuming that the national fiscal regime supports it) that as everything is taxed on the same basis as salaried staff, it should be treated as equivalent to a salary. As such, the personnel rate calculation should be based on this level of income and an appropriate productive hours' denominator should be applied to produce an eligible hourly labour rate.
Based on past experience, there is clearly a risk of different interpretations and applications by different Commission auditors – at least to start with. Logic would suggest the latter scenario should be the way to go; but we shall see.
In conclusion, does Simplification really bring greater simplicity and less red tape for beneficiaries? Overall, probably yes in the main, but not perhaps as much as might be first thought.
GREEN PAPER: From Challenges to Opportunities - Towards a Common Strategic Framework for EU Research and Innovation funding
With FP7 ending in 2013, the EC launched a Green Paper to publicly debate key issues to be taken into account for future EU research and innovation funding programmes.
This Green Paper can be found on the EC website . In some research circles, they have taken to calling this the “FP8 consultation” or similar. In fact although it focuses on what we now know will be called ‘Horizon 2020', the successor programme to FP7, the Green Paper goes much further.
The research, business, government and civil society communities are, in particular, strongly encouraged to participate in the public debate on the key issues. The simplification procedures already announced for FP7 are likely to be only the start of a much wider debate on how to make compliance with the contractual terms and conditions much easier for all concerned.
At the core of the Green Paper is the opinion that future EU funding programmes should focus more on the Europe 2020 strategy, to increase spending on R&D to 3% of GDP by 2020 in order to achieve sustainable growth, a key driver for social and economic prosperity and environmental sustainability.
After evaluating all available programmes (FP7, CIP and EIT) the Commission has identified a number of shortcomings and deficiencies which it is keen to address. These include:
- Frequent misinterpretation of the basic cost eligibility principles (actual, necessary, economic)
- Audited beneficiaries failing to distinguish between the acceptance of the scientific activity report and the eligibility of the costs claimed and reported according to the financial management of the project
- Eligibility criteria of personnel (directly hired vs consultancy and subcontracting arrangements);
- Group companies typically including in the project staff who are not located and employed by the beneficiary but by an affiliated company
- Award of grants to organisations which do not dispose of the organisational and financial capacity to implement the assigned work packages and to provide the required counter-part funding (this category of beneficiaries is typically considered risk prone and therefore selected with priority for financial audits).
The Commission believes that to tackle these and other issues, future programmes must focus on:
- Clarifying objectives
- Reducing complexity
- Increasing added value and leverage and avoiding duplication and fragmentation
- Simplifying participation
- Broadening participation in EU programmes and
- Increasing the competitiveness and social impact from EU support.
It is the Commission's goal to develop a Common Strategic Framework, which would cover and integrate all relevant instruments for research and innovation on the basis of coherent goals and shared strategic objectives.
In its Green Paper it asks a set of 27 questions covering working together to deliver Europe 2020, tackling social challenges, strengthening competitiveness and strengtheningEurope's science base and the European Research Area.
The public consultation closed on 20 May 2011. After evaluating the consultation the Commission hopes to forward its formal legislative proposals for a Common Strategic Framework for EU research and innovation funding before the end of 2011.
About Littlejohn
Littlejohn is an independent, top 30 firm of chartered accountants and business advisors based inLondon'sCanaryWharf. The firm is one of the largest single office practices in theUKand provides a full range of audit, tax, accountancy and financial services toUKand overseas-based clients.
Our RTD audit team
Littlejohn's dedicated RTD audit team has worked extensively with the European Commission over the last 12 years on the 4th, 5th and 6th RTD Framework Programme financial audits in both theUK and internationally.
We have significant experience of the whole range of business entities involved in this field, ranging from small owner-managed businesses to large plcs, universities and research organisations. Our work has encompassed all the differing types of research activity that the RTD programmes cover.
We recognise the uniqueness and complexities involved in RTD contacts and our team is able to draw on its extensive experience of working with the EC, applying it to address our clients' individual needs.
Contact us
We believe in building enduring professional relationships with our clients. Our RTD specialist partners are supported by a team of managers and staff. We deliver added value by ensuring that each client receives a significant and ongoing level of partner involvement.
For an initial discussion with our experienced team, contact:
In London:
David Frame
020 7516 2207
dframe@littlejohnllp.com
Jane Sheridan
020 7516 2282
jsheridan@littlejohnllp.com
In Brussels:
Julian Rummins
0032 (0)2 456 89 18
jrummins@littlejohnllp.com
