Percentage of refund fees

The engagement letter sets a percentage and applies it to the refund, credit or tax reduction that the business receives. The fee becomes due when the benefit arrives. If the tax authority reduces the claim on review, the refund is smaller and so is the fee.

Compare that with a percentage of the amount claimed, where the fee is fixed by the figure on the form. The percentage might be the same. What differs is the moment the fee is worked out and what happens when the claim changes.

On the shared example, a 20% fee on a $250,000 claim is $50,000 if the full amount is received. If the tax authority allowed only $200,000, a percentage of refund fee would fall to $40,000, while a percentage of the amount claimed would stay at $50,000. Illustrative figures.

This model can suit a business that wants to pay nothing up front and wants the adviser to share the risk of a review. Because the fee follows the refund, the adviser has a reason to prepare a claim that holds up, not just a large one.

It can also suit a business that expects a modest claim. On the shared example, a 20% fee costs less than the illustrative fixed fee of $35,000 on any claim below $175,000. Illustrative figures.

No cash is needed before the benefit arrives. The fee moves with the real outcome, so a reduced claim means a reduced fee. The adviser's interest and yours are aligned on the claim surviving review, which is a stronger alignment than a fee on the amount claimed.

The fee still rises with the size of the refund, whether or not the work rises with it. If there is no cap, a large refund can mean a large fee for a routine piece of work.

The timing of payment matters. Some letters make the fee due on filing, with an adjustment later. Others wait for the refund. Read which one you are signing, and what happens if the refund is paid in stages or offset against other tax.

You still carry the main risk of a reduced claim. The claim is in your name, and if it is reduced you usually repay the difference with interest and sometimes a penalty.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 lower fee softens that, but it does not remove it.

Whether a percentage fee is allowed at all for tax work, and on what terms, differs between countries. The detail for your country, and a link to the rules themselves, is on the country pages.

The word refund needs defining. In some countries the benefit arrives as a cash payment; in others it reduces the tax you owe, or does both in different years. Ask the letter to say what counts: cash received, tax reduced, or both, and how a benefit carried forward to a later year is treated. Ask it to say when the fee is worked out, whether it is adjusted if the refund changes later, and what happens if the tax authority offsets the refund against another debt.

Suppose the claim is $250,000 and the tax authority pays $150,000 in cash and allows the rest as a reduction in next year's tax. Under a fee on cash received, the first fee is $30,000, with a further $20,000 when the reduction is used, or nothing further if the letter counts cash only. Under a fee on the amount claimed, the fee is $50,000 now. Under a fee on the benefit received, however it arrives, the total is $50,000 but spread over two years. Three letters, three different bills on the same claim. Illustrative figures.

Is the percentage applied to the refund received, or to the amount claimed? When is the fee due? What happens if the refund is paid in parts, offset against other tax, or reduced after payment? Is there a cap? Is help with a review included?

• Is the fee based on the benefit claimed or received?
• When and how is the fee paid?
• Unclear fee base, a red flag
• Contingent success fees, the related model
• 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