Contingent success fees

The engagement letter names a percentage and the amount it applies to. That amount is usually the tax credit, the refund or the reduction in tax that the claim produces. When the benefit arrives, or sometimes when the claim is filed, you pay the percentage.

Two details decide how the model behaves. The first is the base: whether the fee applies to the amount claimed or the amount you actually receive. The second is whether there is a cap. A percentage with no cap rises in step with the claim, however large it gets. A percentage with a cap stops at an agreed figure.

The worked example above puts the model on the same claim every page on this site uses. On a $250,000 claim at 20%, the fee is $50,000. On a $100,000 claim it is $20,000, which is less than the illustrative fixed fee of $35,000. On a $1,000,000 claim it is $200,000. Illustrative figures.

A contingent fee can suit a business that has little cash to spend before the claim pays out, or that is not sure whether its work qualifies at all. Nothing is due unless the claim succeeds, so the adviser carries the cost of a claim that goes nowhere.

It can also suit a first claim of modest size. Below the crossover point in the example, the percentage fee costs less than the fixed fee for the same work.

The model needs no money up front. It ties what you pay to what you get, so an adviser has a direct reason to find everything that qualifies. If the claim fails, you have not paid for the attempt. For some businesses that trade-off is exactly what they want.

The fee rises with the size of the claim, while the work involved may not. A larger claim is not always more work to prepare, so the fee per hour of effort can be very different from one year to the next.

A percentage of the amount claimed, rather than the amount received, means you can owe the full fee even if the tax authority later reduces the claim. The claim is made in your name, so if it is reduced you usually repay the difference, with interest and sometimes a penalty, whatever the adviser was paid.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.

A fee that depends on the outcome can also pull in the direction of a bigger claim. That is not a reason to assume anything is wrong. It is a reason to ask how the adviser decides what qualifies, and to see the whole claim before it is filed.

Rules on contingent fees for tax work differ between countries. In the United States, Treasury rules for practitioners restrict contingent fees for matters before the IRS, with exceptions, and a 2014 US federal court decision has shaped how the rule applies to refund claims.2Source 2Treasury Department Circular No. 230, 31 CFR section 10.27 (contingent fees), and Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014). More detail on the United States pages. In Canada, the claim form asks for details of any claim preparer and the billing arrangement, including whether a contingency fee applies.3Source 3Canada Revenue Agency, Guide T4088, Part 9 "Claim preparer information" (Form T661), and Income Tax Act section 162(5.1) to (5.3). More detail on the Canada pages. The detail for your country, and a link to the rules themselves, is on the country pages.

A contingent fee only works for you if the letter answers the questions the model raises. Look for four things. The base, named precisely: the credit claimed, the credit received, or the reduction in tax, and whether that is before or after any offset against other tax you owe. The percentage, and whether it changes with the size of the claim or the year. Any cap, and whether it applies per year, per project or overall. And a clause on what happens if the claim is reduced, withdrawn or never filed: whether the fee is recalculated, refunded in part, or stays as it was.

If the letter is silent on any of these, ask for a sentence to be added. A sentence costs nothing to write before you sign and a great deal to argue about afterwards.

Take the shared example again. A business expects a $250,000 claim and signs a 20% fee on the amount claimed. The claim is filed and the fee of $50,000 is invoiced. A year later the tax authority reviews the claim and allows $200,000. The business repays $50,000 with interest where it applies. The adviser's fee stays at $50,000, because the letter tied it to the amount claimed. Had the letter tied the fee to the amount received, the fee would have been $40,000. Had the letter included a review support clause, the business would at least have had help with the questions. Illustrative figures.

The lesson is not that the model is bad. It is that two short sentences in the letter decide who carries $10,000 of risk, and the business should know which way they point before signing. Illustrative figures.

What exactly is the fee a percentage of? Is it the amount claimed, or the amount received? Is there a maximum? If the claim is reduced after filing, does the fee come down, and is any part refunded? Does the fee cover help if the tax authority asks questions? Will you see the full claim before it is filed?

Ask for the answers in writing, and ask for a worked example on your own figures.

• What exactly is the fee a percentage of?
• What happens to the fee if the claim is reduced?
• Uncapped success fees, a red flag, and a fee you can work out yourself, a green flag
• Contingent versus fixed fees on the same claim
• 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
2. Treasury Department Circular No. 230, 31 CFR section 10.27 (contingent fees), and Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014). More detail on the United States pages.  Back
3. Canada Revenue Agency, Guide T4088, Part 9 "Claim preparer information" (Form T661), and Income Tax Act section 162(5.1) to (5.3). More detail on the Canada pages.  Back