To have the highest rate of tip, they have to tip the rest of their money. All of it.
To find out how much money they have left after paying the bills, we subtract 1200 from the cost.
-> 1200 - 996.4 = 203.6
Therefore, the highest rate of tip they can do is 203.6 : 1200 = 16.97% (2 d.p)