Guide

The true cost of a claim

Fees, internal time, review risk and repayment risk together: how to see what a claim really costs before you decide how to make it, with the shared example worked through a good year and a bad one.

10 minute read

The fee is the cost everyone sees. It is not the only one. A claim also costs your people's time, it carries the possibility of a tax authority review and the help that review needs, and it carries the risk that some of the benefit will have to be repaid. A business that counts only the fee will choose badly between fee models, and may make a claim it would have been wiser to leave. This guide puts the four costs together, on the shared illustrative example, so that you can do the same with your own figures.

Step 1: start with the fee

Take the fee at the claim you expect, from the written proposal, and add the extras: review support if it is priced separately, hourly work outside the scope, any minimum. The how to compare proposals guide does this for several proposals at once. On the shared example, a claim of $250,000 costs $50,000 under a 20% percentage fee and $35,000 under a fixed fee; at $100,000 the figures are $20,000 and $35,000. Illustrative figures.

Write the fee down as a cash sum and as a share of the claim. Both matter: the cash sum is what leaves the business, and the share is what tells you whether the claim is worth making at all once the other costs are added.

The fee at the expected claim, with extras
The fee at half the expected claim
Each as a share of the claim

Step 2: add your own time

Every claim takes time inside the business, whoever prepares it. The people who did the technical work are interviewed and read the technical descriptions. The finance team pulls time records, payroll and cost ledgers, and answers questions. Someone reads the engagement letter, the proposals and the claim itself. If the claim is prepared in-house, add the hours to write the technical case and the figures, and the hours to learn the process the first time.

Estimate the hours honestly and value them at what the time is worth to the business, which for a technical lead in the middle of a project may be a great deal. This guide does not give a figure for internal time, because it depends entirely on your people and your records; the in-house or adviser guide helps you estimate it. Better records mean fewer hours.

Hours for technical interviews and review of the descriptions
Hours for finance records and questions
Hours to read the letter, the proposals and the claim
If in-house: hours to write the claim, plus learning time

Step 3: price the review

A tax authority can review a claim after it has been paid, within time limits set by law that run for years in every country this site covers.1 A review costs time whatever happens: gathering records, answering questions, meetings. It also costs money if the adviser's help is not in the price. An hourly rate with no estimate is the term to look for; on the shared example, the hourly model is 120 hours at $250, which is $30,000, and a 60 hour overrun takes it to $45,000. Illustrative figures. The shared hourly example is for preparing a claim; it is used here only to show what an overrun does to an hourly fee.

You cannot know whether a review will come. You can know what it would cost if it did, and you can make sure that the help is either included or priced with a budget. The review and audit support clause page shows what to look for, and the is review support included question is the one to ask.

Review support: included, or the rate and an estimate
Your own time in a review, estimated
The period in which a review can arrive, from your country page

Step 4: price the repayment risk

If a review reduces the claim, the business repays the difference, with interest where it applies and sometimes a penalty, whatever the fee model and whoever prepared the claim.2 Whether the fee comes down too depends on the engagement letter: a fee on the amount received falls with the claim; a fee on the amount claimed stays unless a refund clause says otherwise; a fixed fee stays.

On the shared example, a $250,000 claim reduced to $200,000 on review means repaying $50,000, with interest where it applies. Under a 20% fee on the amount claimed, the fee stays at $50,000; on the amount received it becomes $40,000; a fixed fee stays at $35,000. Illustrative figures. The size of the repayment risk is not set by the fee model but by how well the claim was prepared and how far it reached: a claim that includes doubtful projects carries more of it than one that leaves them out, which is why the how do you decide what qualifies question belongs in a conversation about cost.

What the fee does if the claim is reduced, from the letter
The interest and penalty rules for your country, from the country page
Which projects in the claim are the doubtful ones

Step 5: put it together

Here is the shared example in a good year and a bad one, under two fee models. The internal time line is left blank because only you can fill it; the review line assumes support is included in both. Illustrative figures.

	Percentage fee, 20%	Fixed fee
Claim as filed and paid	$250,000	$250,000
Fee	$50,000	$35,000
Internal time	your estimate	your estimate
Good year: benefit kept after the fee	$200,000	$215,000
Bad year: claim reduced to $200,000, $50,000 repaid with interest where it applies	repaid $50,000	repaid $50,000
Bad year: fee if it is on the amount claimed	$50,000	$35,000
Bad year: fee if it is on the amount received	$40,000	$35,000
Bad year: benefit kept after the fee, fee on the amount claimed	$150,000	$165,000

Illustrative figures, before interest, penalties and internal time. Neither column is the right answer. The percentage fee is cheaper on a small claim and costs nothing if the claim fails; the fixed fee is cheaper on a large claim and does not rise with it. What the table shows is that the bad year is decided by the refund clause and the review support clause as much as by the model, and that a business should know its bad year number before it signs.

The table filled in with your own figures
The bad year costed under each proposal
The internal time line filled in

What the table leaves out

Two costs do not fit in a table and still count. The first is the cost of a claim that is never made: a business that decides the risk is too high gives up the benefit entirely, and that is a real figure to set against the fee and the internal time. The second is the cost of a claim that is made badly and never reviewed: nothing is repaid, but the file is thin, the technical case is unread, and the next claim starts from a weak base. Neither appears in the bad year column, and both are reasons to treat the cost of a claim as something to manage over years rather than to minimise in one.

Step 6: decide what the claim is worth

With the four costs in front of you, the decision is whether to make the claim, how large to make it, and how to pay for it. A claim worth making is one where the benefit kept after the fee and your own time is clearly worth the risk you are carrying. If it is not, the options are to narrow the claim to the projects you are sure of, to change the way it is prepared, or to wait a year and keep better records. None of those is a failure. The how to negotiate fees guide covers the terms that change the bad year number, and the calculator shows the fee lines for your own claim.

Benefit kept after the fee and internal time, good year and bad
The claim narrowed to the projects you are sure of, if the risk is too high
The terms that reduce the bad year number asked for

Sources

A tax authority can review a claim after it has been paid, within time limits set by law: Internal Revenue Code section 6501 (United States); Finance Act 1998 Schedule 18 paragraphs 24 and 46, via HMRC Enquiry Manual EM1510 and Compliance Handbook CH51300 (United Kingdom); Taxes Consolidation Act 1997 section 959AA, via Revenue Notes for Guidance Part 41A (Ireland); Income Tax Act section 152(3.1) and (4) (Canada); Income Tax Assessment Act 1936 section 170, Income Tax Assessment Act 1997 section 355-705 and the ATO, Request an amendment to a business or super tax return (Australia); Tax Administration Act 1994 section 108, via Inland Revenue SPS 20/03 (New Zealand); Income Tax Act 1947 section 74 (Singapore). More detail on your country page. Back
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). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. Back

General information about choosing and managing an adviser. It is not advice on whether your work qualifies for R&D tax relief.

KnowYourFees.org is published by Swanson Reed, an R&D tax advisory firm that competes with other advisers. This site does not recommend any adviser, including Swanson Reed.