The fee that stayed when the claim shrank

A software company with about 40 staff made its second R&D claim with an adviser it had used the year before. The claim was built on three development projects and came to $250,000 on the shared illustrative example. The engagement letter set the fee at 20% of the benefit. Illustrative figures.

The letter defined the benefit as the amount of relief shown in the claim as filed, and made the fee payable within 30 days of filing. There was no clause on what happened if the claim was later reduced, and the review support clause said that help was "available on request", without a price. The finance lead read the fee percentage and the payment date and did not read the definition.

The claim was filed, the fee of $50,000 was paid, and the benefit arrived. Two years later the tax authority opened a review and asked for the technical case behind one project. The company's developers, reading the description for the first time, could not support the claim that one part of the work had been uncertain. The claim was reduced to $200,000, and the company repaid $50,000 with interest where it applied.1Source 1The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). More detail on your country page. The adviser's help with the review was charged by the hour. The fee did not change, because the letter tied it to the amount claimed and nothing in the letter brought it down. Illustrative figures.

The company paid a fee of $50,000 on a benefit that turned out to be $200,000, which is 25% of what it kept, and paid for the review help on top. A fee on the amount received would have been $40,000. A refund clause would have returned $10,000. Illustrative figures.

Two sentences in the letter: a definition of the benefit as the amount received rather than the amount claimed, or a fee refund clause that recalculated the fee on the amount finally agreed. One question before signing: what happens to the fee if the claim is reduced? And one habit: the developers reading the technical descriptions before filing, which would have caught the weak project before the tax authority did. None of this makes a percentage fee the wrong model; the same model with those two sentences would have shared the risk the way the company thought it did.

Sources

1. The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). More detail on your country page.  Back