Charging Contingency Fees in Tax Practice: What You Need to Know
As a tax practitioner in South Africa, knowing when you may charge contingency fees for tax services rendered is crucial. These fees, linked directly to the financial outcomes of your services like tax savings or refunds, are subject to specific rules that govern their application. Below we clarify these rules and offer practical insights to ensure compliance while aligning your compensation with successful outcomes.
What are Contingency Fees?
Contingency fees are based on a percentage of the tax savings or refunds secured for a taxpayer or the reduction in the tax liability.
Prohibition of contingency fees for tax services
Charging contingency fees is prohibited by the South African Revenue Services (SARS) when preparing or correcting tax returns. SARS re-iterated this prohibition in the Tax Practitioner Connect Newsletter of October 2023. Specifically, SARS emphasises that a tax practitioner’s fees should be in line with the complexity of the task at hand.
When are you allowed to charge Contingency Fees?
SARS allows tax practitioners to charge contingency fees in these specific circumstances:
Resolving disputes under Chapter 9 of the Tax Administration Act (TAA), where taxpayers contest assessments or decisions from SARS about their tax obligations. Tax practitioners can charge based on the tax savings achieved through objections and appeal processes.
Handling applications to review SARS decisions under Section 9 of the TAA. This covers reviews of non-assessment decisions like penalties and administrative rulings.
Requirements for a Written Agreement
In the circumstances that allow a contingency fee arrangement, there must be a formal, written agreement that includes:
Details of the tax practitioner and the client or taxpayer.
Detailed outcomes upon which fees are based and the corresponding percentage.
When the contingency fees are charged.
Terms outlining the consequences if the desired outcome isn’t achieved.
A clause allowing the client to have the agreement reviewed by the Recognised Controlling Body (RCB) such as CIBA, which can adjust or nullify the terms if deemed unfair.
Ethical Considerations
While advantageous in certain scenarios, contingency fee arrangements demand high ethical standards. It's vital to avoid conflicts of interest and ensure that your practices don’t adversely impact the broader tax system or the client's position. Charging contingency fees for tax services such as preparing returns is inherently problematic because it can incentivise behaviours that risk abusing the tax system. Originally, such concerns led to the prohibition of contingency fees in certain tax-related services.
Staying compliant
Simply put, you cannot use contingency fees for compiling or correcting tax returns as this approach could jeopardise their objectivity and integrity.
Staying informed and compliant with SARS guidelines on contingency fees is not just about legality—it’s about maintaining the trust and confidence of your clients and upholding the integrity of the tax profession.
Become a licensed tax practitioner with CIBA and be able to provide tax services to your clients.
CIBA tax practitioner license will provide you with an opportunity to expand your service offerings.
CIBA’s Licensed Tax Practitioner: Compiler
The Compiler license validates the holder's ethical practice and basic competency in tax compliance, making it ideal for professionals looking to affirm their capability to manage general tax services for individuals and entities. Key functions include:
Handling tax returns, records, and objections.
Managing early-stage SARS queries and audits.
CIBA’s Licensed Tax Practitioner: Advisor
The Advisor license represents a superior level of tax expertise, essential for those dealing with complex tax situations in large businesses and trusts. This advanced credential confirms the practitioner’s ability to:
Navigate intricate tax laws.
Provide expert tax advice and write opinions.
Oversee comprehensive tax issues including corporate and payroll tax matters.
Obtaining these licenses from CIBA not only enhances professional credibility but also equips practitioners with the necessary skills to handle a broad spectrum of tax-related duties effectively.
