UK cannabis accounting industry ready to roll
Britain is on the cusp of becoming a major force in the global cannabis industry, and early adopter firms that recognise the multi-billion-pound opportunity on their doorsteps to service the sector stand to make the most gains, experts have said.
Mainstream acceptance of cannabis is increasing across the world, and more than 50 countries have legalised some form of cannabis for medical use, including the UK which tweaked its laws in November 2018.
Seven jurisdictions, including Canada, Uruguay, South Africa and 11 US states have all legalised cannabis for personal or recreational use, feeling the public health concerns are overstated and the tax revenue is worth pursuing.
According to a report earlier this year by US analysts New Frontier Data, more than 260 million adults worldwide consume cannabis at least once per year, collectively spending approximately $344bn annually. Usage in regulated markets, however, remains dwarfed by demand of illicit black markets.
New products containing cannabinol (CBD), the non-psychoactive element of the cannabis plant, are being launched every day, with the health and wellness market currently catering for everything from face cream to pet food.
Along with the explosion in CBD products, multiple lobby groups and consultancies related to cannabis have sprung up in Britain in the last 12 months.
Multinationals such as PwC, Deloitte, KPMG and EY have dedicated cannabis teams in Canada, the epicentre of the industry and home to most of the largest publicly-traded cannabis businesses. However, European law firms have started to spin off cannabis-specific practices from their life science arms, where the work would traditionally have been carried out.
The first law firm to have its own dedicated cannabis team in the UK was Mackrell Turner Garrett. Head of the practice Robert Jappie told AccountingWEB he sees an enormous opportunity for accountancy and audit firms to specialise, but they would have to act fast given the pace at which the industry is moving.
“As of today, I haven’t seen any accountancy firms openly courting the cannabis industry in the UK and Europe,” Jappie said. “I have no doubt that whoever does so first will reap the benefits.”
Mackrell Turner launched their cannabis department in May 2018 after carrying out substantial due diligence on the sector and studying the US trends and business practices that are slowly making their way over the Atlantic.
“We spent a week in Las Vegas and Denver meeting with businesses and visiting cultivation facilities. I thought we would find we were perhaps two-to-three years behind the US. In fact, it was more like eight or nine. What was even more interesting was that, amongst the business support services thriving in the sector, it wasn’t the lawyers that were most valued. It was the accountants.”
As the industry developed and more regulation was introduced, the tax regime became increasingly more complex, Jappie said. “Banking and payment processing services were also very difficult to come by as Cannabis is still considered a risk sector,” he said. “Accountants servicing the cannabis sector have become essential in navigating the complex tax regulations that were introduced.”
The cannabis boom is being driven in large part by activity in the Americas. While Uruguay was the first to legalise in 2013, 11 US states have an adult recreational market and more than 30 states have updated legislation to allow for medicinal cannabis to be prescribed.
Capitalist forces have now been unleashed the US, sensing the huge amounts of tax revenue on offer for a fully legal and regulated cross-state market. However, these have been somewhat stymied by law. Cannabis remains a scheduled substance at federal level and in simple terms, it remains a felony offence to conduct business involving a scheduled drug.
This means no US bank can risk touching a business that is involved in essentially the drugs trade, which firms supplying recreational product are, and cannabis operations are having to look to Canadian lenders for help. Businesses relying on cash transactions are unable to get insurance, open bank accounts, get loans to grow the business and are forbidden from conducting cross-border trade.
The US accounting sector is also grappling with the tax implications of serving cannabis businesses, with some clear lessons for Europe to learn should recreational markets begin to open up in the continent.
Skilled Certified Public Accountants with industry-specific knowledge are highly sought after to help business owners mitigate the seed-to-sale risks surrounding growing, distributing, and transporting their products. This includes dealing with the aforementioned issues.
Specific federal, state, IRS and FDA regulations must also be considered, alongside the operational complexities created as a result. CPAs must figure out cost, accrual, and absorption accounting as well as 471 and 280E tax rules.
Tax section 280E is the federal statute that stops a cannabis business from enjoying tax deductions or credits because cannabis is a Schedule I controlled substance. Therefore, cannabis operators pay taxes on all of their revenue and cannot use business expenses as tax deductions.
“Cannabis firms in the US are currently concerned about audits from the IRS, and countries following the trends coming out of the states should be well aware that these issues will make their way over as the industry matures, they will have targets on their backs,” said Michael Patterson, chief executive of US Cannabis Pharmaceutical Research and Development (USCPRD).
“There is a perfect opportunity for accountants and auditors right now to educate themselves about an enormous and exciting industry that is opening up, that will bring enormous opportunities,” Patterson told AccountingWEB from the USCPRD’s headquarters in Florida.
the UK itself is the world’s largest exporter of legal cannabis in the world."
US businesses are currently conservative with the amounts of money they are taking out, and are extra cautious with taxes and expenses because they know they are in the crosshairs of regulators, said Patterson. “There is a stigma over cannabis, and so having accountants who understand the nuances of the laws around dealing with scheduled narcotics is vital,” Patterson said.
The European Union is currently mulling how to standardise laws around medicinal cannabis, tearing down some of the barriers to research and making it easier for cannabis-related projects that have medicinal value to get off the ground. This opens a door for European accounting firms to begin researching where their services could be most valued, Patterson said.
“The most important thing to do now is to start educating accounting associations that this change is coming,” he said. “Help them understand some of the complexities that exist around dealing with cannabis companies in various jurisdictions, and how they can become an integral part of a lucrative industry.”
Cannabis in the UK
The UK’s position in the global cannabis ecosystem is complex. There is no recreational market due to the drug’s status as a Class B narcotic, which carries a jail term for production and distribution. The UK’s medicinal market is currently so small and wrapped in red tape it may as well not exist, and yet the UK itself is the world’s largest exporter of legal cannabis in the world.
This is down to UK company GW Pharmaceuticals, which cultivates medical cannabis for the production of cannabis-based medicines such as Epidiolex and Sativex from a farm in East Anglia. The firm supplies the US, using greenhouse facilities owned by British Sugar, and produces around 90 legal tonnes each year.
Given the success of GW Pharma, advocates believe it is only a matter of time before the government sees the potentially enormous tax stakes that could come with nurturing a sector that is already up and running to some extent.
A report by specialist cannabis analysts Prohibition Partners projects the UK’s medicinal market could be worth up to £8.8bn in the next decade. It is estimated that there are as many as 3.6m active cannabis users in the UK, contributing to an estimated black market value of up to €6bn per year. In addition, research by Prohibition Partners shows that medical cannabis can treat up to 2.9m patients in the UK.
Last year, the UK legalised medicinal cannabis when prescribed by specialist doctors following a huge push by advocates highlighting the plight of sick children who could be treated by oils derived from the plant.
However, despite early optimism, Home Office bureaucracy has ensured that very few patients who meet the strict criteria have managed to get hold of cannabis.
The new rules did not recommend the use of cannabis oil, and experts say there has been little education of the UK’s medical profession, which is still reticent to prescribe cannabis.
In response, doctors and government medical specialists have said there is not enough research on the effect of cannabis for medical purposes, and the drug is still too expensive to acquire for most patients.
The deadlock is unlikely to be broken in the short-term as Brexit uncertainties cripple the ability of the UK Parliament to pass new laws, meaning the cannabis debate is likely to be shelved for now.
This has not stopped the flow of CBD products reaching consumers through the high street, however, and has not stopped entrepreneurs moving into the space attempting to move the industry image away from bedroom stoners towards wellness and healthcare.
Those in the industry have a responsibility to act as stewards, to ensure operations are ethical, within the current regulations and laws, and do their very best for the entire industry, said Robert Sidebottom, director at Hemp and CBD Media and Dushey Ltd.
“The cannabis machine has started,” he said. “We will hopefully have appropriate legalisation at some point, and what will be important is the shape of those laws.”
There are no margins for error in terms of audit or bookkeeping for firms selling CBD, and anyone seeking to enter the cannabis sector in the future can expect standards to be even tougher, he said.
"The hoops to jump through to make sure you are operating a customs warehouse, for example, correctly, are enormous,” Sidebottom said. “That level of scrutinising, due diligence, should be a requirement for any CBD manufacturer in future, and I can absolutely see a licensing regime. Firms will want to make sure they are open for scrutiny at any point. It's an embryonic space, and companies that win are those which are compliant and have standards.”
For serving those businesses, either in audit or accountancy, however, the potential is incredible, he said.
“It's a watching brief for accountants, but the opportunities that present themselves with hemp are almost infinite: for farmers, technology, plastics, batteries, clothing, where does it end?”