Fixed fees

The engagement letter states the fee and when it is payable, often in stages: part on signing, part on filing, or all on completion. Some letters quote one fee for the whole claim. Others quote a fee for each year or each project, or add charges for extra work such as answering questions from the tax authority.

On the shared example, the illustrative fixed fee is $35,000. On a $250,000 claim that is less than a 20% fee of $50,000. On a $100,000 claim it is more than a 20% fee of $20,000. The two models cost the same at a $175,000 claim on these assumptions. Below that figure the percentage fee is cheaper; above it the fixed fee is cheaper. Illustrative figures.

A fixed fee can suit a business that expects a claim well above the crossover point, that wants to know the cost before it starts, or that has the cash to pay regardless of the outcome. It can also suit a business whose claim is similar year after year, so the work is predictable.

You can work out the fee from the letter alone. Two fixed fee proposals can be compared in a minute. The fee does not rise with the claim, so there is no pull towards a bigger figure, and a larger claim in a good year does not mean a larger bill. If the claim is reduced on review, the fee does not change, because it was never tied to the claim.

On a small claim, a fixed fee can cost more than a percentage fee for the same work. In the example, it costs $15,000 more on a $100,000 claim. If you are not sure how large the claim will be, or whether the work qualifies at all, you may pay the full fee for a small or unsuccessful claim. Illustrative figures.

The fee is usually due whether or not the claim succeeds. Read what the letter says about a claim that is withdrawn, a claim the adviser decides not to file, and a claim that is reduced. Some letters refund part of the fee in those cases. Others do not. Read which one yours is.

A fixed fee can also hide extras. A low headline fee with charges for each meeting, each revision or each tax authority question can end up costing more than a higher fee that includes them. Ask what is in the price.

A fixed fee does not change who carries the tax risk. The claim is in your name, and if it is reduced you usually repay the difference with interest and sometimes a penalty, whatever you paid the adviser.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 fixed fee is only fixed if the scope is. The letter should say what work the fee covers: which years, which projects, how many meetings, how many drafts, and whether help with a tax authority review is in or out. It should say when each part is due, and what happens if the claim is withdrawn, not filed, or reduced. It should say what the fee will be next year, or how it will be set, so that a low first-year fee does not become something else at renewal.

A business weighing a $35,000 fixed fee against a 20% percentage fee estimates its claim at $250,000. On that figure the fixed fee saves $15,000. The business then asks itself what happens if the claim comes in at $100,000, because the biggest project may not qualify. On that figure the fixed fee costs $15,000 more. The question is not which model is cheaper. It is how confident the business is about the size of its claim, and whether $15,000 either way matters more than knowing the cost in advance. Illustrative figures.

What does the fee include, and what is extra? When is it payable? What happens to the fee if the claim is withdrawn, not filed, or reduced? Is help with a review included? What would the fee be next year?

• How are your fees calculated?
• Is review support included?
• A fee you can work out yourself, a green flag, and review support costs extra, a red 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