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Claiming the R&D Tax Incentive? Why a success fee may not be a good idea.

There are two basic models for outsourcing tax claims – and one of them is not what it seems.

The first is Fee for Service and the second is known as a Success Fee.

A Fee for Service is a set cost, established up front and charged on an annual basis.

In managing R&D Tax Incentive claims for our clients, I see the work in large part being one of compliance. The set fee covers the cost of registering for the Incentive, handling the schedule, identifying and collecting original documentation and making the financial calculations. All the necessary tasks to handle any questions the Government regulators, namely the ATO and AusIndustry, ask of you.

A Success Fee comes from a different mindset where you only pay the agreed sum if you “win”.

The agent offering a Success Fee says, “You might have an R&D claim and we will work with you to find out and we’ll share the risk. You pay nothing upfront and we’ll get paid if and when you receive a benefit.”

This sounds like a very attractive offer and, typically, the fee is charged as a flat percentage of the claim expenditure submitted to the Government under the self-assessment regime. If the company is eligible for a refund, it is almost always automatically paid but the Government reserves the right to audit claims up to 4 years after payment. So the receipt of the refund is not a guaranteed “success” as the Government may seek repayment if the claim fails on audit down the track.

Lawyers advertise Success Fees for things like Workers Compensation cases.

But there you are paying for legal representation in a process which may take a long time and involve the counter-claims of employers and insurance companies. And the result is determined by a third party such as a court or tribunal. That third party determines the success of a case and the amount paid against which the fee is charged.

The R&D Tax Incentive is different altogether. You assess the amount receivable under self-assessment. Until the audit window closes, the “success” of the claim is not resolved.

Eligibility and requirements are spelt out by AusIndustry and the Tax Office. Your claims are ultimately eligible or not eligible according to the prevailing legislation and directly subject to the views of the Government. That is why R&D tax work is compliance work. It secures your entitlement. It is not winning the award of funds from the Government.

I can arrive at a company and within 15 minutes know if their activities are eligible. So where is the risk? Why pay someone on the basis that the claim is unknown upfront and only resolved when the Government sends a cheque when the reality is very different.

Success Fees are a concern for another reason and this relates to economies of scale. Simply put, a straight line success fee implies a $1 million R&D Tax claim requires 10 times the amount of work of a $100,000 R&D Tax claim.

This is simply not the case. Any fee should be a reflection of the skill and value delivered by a service provider. It should also reflect the time involved. Larger claims will require more compliance work but not in direct proportion to the ultimate dollar value of the claim.

Furthermore, different industries generally have different R&D profiles. A $1 million claim in software development might involve claiming 3-4 projects whereas a mature manufacturer may have 8-10 projects. Why should the IT company be paying the same fee as the manufacturer if there is significantly less compliance work and time involved?

So ask yourself – is it worth it? Is a straight line success fee an appropriate measure of the compliance work involved? Or of the value added by the service provider? For something to which you are entitled and a service that saves your time and talents that are better spent elsewhere in your business?

Don’t let Success Fees take valuable R&D funds out of your business.

For more information on the R&D Tax Incentive, subscribe to this blog, download this ebook, join the conversation.

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