Capped fees

The engagement letter names a percentage, the amount it applies to, and a cap. The fee is the lower of the percentage and the cap. On a small claim the cap never comes into play. On a large claim the cap is what you pay.

On the shared example, a 20% fee capped at $60,000 is $50,000 on a $250,000 claim, the same as an uncapped fee. The cap is reached at a $300,000 claim on these assumptions. On a $1,000,000 claim the capped fee is $60,000, while the uncapped fee is $200,000. Illustrative figures.

Where the cap sits is everything. A cap set far above any claim you are likely to make gives you nothing. A cap set close to your expected claim gives you most of the protection of a fixed fee.

A capped fee can suit a business that wants to pay nothing up front but whose claim could turn out large. It is one compromise for a business that likes the idea of a success fee but not the idea of an open-ended one. It can also suit a growing business whose claim is small now and may not stay small.

Nothing is due unless the claim succeeds. The fee cannot run away with a large claim. You can see the worst case before you sign. A cap is also something you can ask for: an adviser who proposes an uncapped percentage may agree to a cap if you raise it, and the script for asking for a fee cap shows one way to do that.

Below the cap, the model carries the same risks as any percentage fee. The fee rises with the claim while the work may not. The base matters: a cap on a percentage of the amount claimed still leaves you owing the fee if the claim is later reduced.

A cap can be set per year, per project or for the whole engagement, and the difference is large. A cap per project on a claim with several projects may not limit much. Read which one you are being offered.

Some letters pair a cap with a floor, a minimum fee that is due even on a tiny claim. A minimum can turn a success fee into something closer to a fixed fee on a small claim. Ask whether there is one.

As with every model, the claim is in your name. If it is reduced you usually repay the difference with interest and sometimes a penalty, whatever the fee arrangement.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 cap needs to be written as a number, with the period or scope it applies to, and the letter needs to say whether anything sits outside it. A cap on the success fee with hourly charges for review support outside it limits one cost and leaves another open. If there is a minimum fee, the letter should state it, and say whether it is due on a claim that fails.

A growing business expects a $250,000 claim this year and perhaps double that next year. An uncapped 20% fee would be $50,000 now and $100,000 next year for similar work. A 20% fee capped at $60,000 is $50,000 now and $60,000 next year. A fixed fee of $35,000 is $35,000 both years. The capped fee costs the business more than the fixed fee in both years on these figures, but it costs nothing if the claim fails, and the business did not have to find $35,000 before the benefit arrived. Which of those matters more is the business's call. Illustrative figures.

What is the cap, and does it apply per year, per project or overall? Is there a minimum fee? What is the percentage applied to? What happens to the fee if the claim is reduced? Can the cap be lowered?

• What happens to the fee if the claim is reduced?
• Are there minimum or exit fees?
• Asking for a fee cap, a script you can send
• Uncapped success fees, the red flag a cap answers
• Fee comparison calculator

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