‘Overlooked’ accountants face Brexit hit
The UK’s £225bn professional services industry faces a “catastrophic” threat from Brexit after being ignored during the negotiations, a parliamentary committee has warned.
A House of Lords’ EU services subcommittee report said the UK’s accountants, lawyers, and consultants are under risk of losing contracts and jobs when Britain's transition period ends on 1 January.
The report said the government had neglected the “hugely important” industry, which is the UK’s leading services export. It is worth more than three times the value of the UK’s leading goods export, cars.
“This sector, and the people who depend on it for their livelihoods, will suffer if its needs are not reflected in the UK’s negotiations with the EU,” said committee chair Baroness Donaghy. “We are concerned that they have been overlooked in the negotiations so far.”
Professional services provided £225bn gross value added to the economy in 2019 and currently employs 13% of the UK’s workforce. The EU is also the largest market for the UK’s professional and business services, amounting to 37% of exports at £35bn.
“The biggest issue that accountants will have to deal with is the uncertainty and new legislation which will be passed both in the short and longer term,” said Peter Bracey of Bracey’s Accountants.
“Businesses up and down the country will be looking to their accountants for support and there will either be a huge amount of new information to absorb or the information just won’t be available. Either way, proactive accountants should be supporting their clients now in forecasting and scenario planning for multiple different outcomes.”
No deal worse than a bad deal
The Lords committee said even a “Canada-style” trade deal with the EU, in which the UK would dodge tariffs and quotas, wouldn’t prevent damaging restrictions on professional services exports from January.
Canada’s current trade agreement with the EU, known as Ceta, allows European countries to apply national reservations to protect their firms from foreign competition.
These restrictions includes demand that companies demonstrate local talent is not available, that foreign professionals become residents in certain countries, and that firms enact domestic corporate structures.
The Lords committee said that Ceta-style clauses “could be catastrophic for the UK’s professional and business services sectors”.
Without a UK-EU agreement, UK accountants, consultants, lawyers, and auditors “may become unable to operate in the EU under UK-specific corporate structures, in particular limited liability partnerships,” the report said.
A no-deal Brexit would be hugely damaging for industry and Britain’s reputation at large, the peers found. “If the UK leaves without a deal, we are concerned that there may be a global perception of the UK not having sufficient co-operation with the EU, and therefore a perception that the UK is no longer a landing pad for brands to come to the UK first,” the report said.
The report said professional services is one area “where a bad deal could be worse than no deal”, if mutual recognition of professional qualifications is not granted in any trade agreement with the EU.
Opportunity and risk
Bracey said while Brexit presents risk and opportunity for professional services organisations, he is optimistic that for the vast majority of mid-sized accounting firms, the latter will exceed the former.
“The changes that Brexit will bring about for the mid-market mean that we will need to assist many of our clients in ensuring they are able to continue to trade with Europe and interpret any additional trading requirements to enable them to do that,” Bracey told AccountingWEB.
“Uncertainty is a big issue with VAT, especially at the current time. Trying to interpret VAT legislation and how this will work for companies trading in Europe is impossible when no-one knows what the rules will be around the movement of goods.”
With regard to audit during this transitional period, he said the uncertainty has significantly impacted auditors’ assessment and judgements, particularly in certain areas like going concern. “This will continue to feature heavily in assessments going forward with changes in international accounting standards further impacting reporting for larger firms,” Bracey said.
When Brexit does occur, the audit exemption surrounding subsidiary companies will no longer be available unless the parent is a UK company, Bracey said. “The ultimate impact is that it will require auditors to apply more judgement on the business and the audit risk overall. If anything, again, this will benefit mid-sized firms as there will be more audit work that needs to be carried out.”
Data adequacy concerns
George Riddell, director of trade strategy at EY and former UK trade official, said the impending trade barriers fall into two categories: cross-cutting, which will apply to all service providers, and those specific to professional services.
The first includes issues such as restrictions on activities that business visitors can undertake when travelling between the UK and the EU. “The days of jumping on a plane and doing whatever you want are over,” he said. “Many people are going to need a work visa.”
The other is the question of data flows and whether or not the UK is going to get an adequacy decision under the EU’s General Data Protection Regulation, he said.
Securing a data-sharing deal is vital to current trade agreement negotiations, with many businesses relying on the free flow of data between the UK and EU.
Prime Minister Boris Johnson has said that an adequacy agreement, in which the UK’s data regulations would be of a similar enough standard to the EU’s and therefore allowed to continue as usual, is “self-evidently in the [UK’s] interests”.
However, the Lords committee said it is worried about the lack of an EU decision on a data adequacy agreement so far. “We are concerned that there is a possibility that the commission may not grant the UK a data adequacy decision,” it added.
“These barriers are going to impact all service providers,” Riddell said. “But given professional services firms are made up of people and data - these barriers matter.”
Sector specific barriers cover regulated professions including auditors, accountants, lawyers and consultants. New limits will be put on permissions and the licences for firms themselves to operate in different countries, as well as the recognition of individual's professional qualifications.
“Leaving the EU’s single market will mean that many barriers are going to be there where they weren't before,” Riddell said. “The added kicker to all of this is that many of the barriers differ between EU member states. So, while a provider may meet all the requirements for one, they may not for another. This adds a whole other level of complexity to trying to figure out if they can keep trading.”
Riddell said the sector fell victim to the wider negotiating dynamics and lack of time: “Services and investment got one whole day during the last negotiating round. That’s not a lot of time. January 1 is going to look very different for them than what we have right now. SMES need to start preparing. There’s a lot that can still be done.”
Recent Financial Reporting Council statistics showed the Big Four’s fees for non-audit work had dropped by 20.8% year-on-year. Shamus Rae, founder and CEO of professional services consortium Engine B said it was an indicator of how firms can not afford to lose out on any revenue at this time.
“For several years, margin decline at the Big Four has been an issue, with profits falling from 30% in 2006 to just over 18% in 2019,” Rae told AccountingWEB. “It is premature to describe it as an industry in crisis, but it is under tremendous pressure.”
He said the largest firms had not seen revenue per employee rise in line with inflation, which has put pressure on productivity improvements to maintain margins, with varying degrees of success.
“If you add in confusion and potential revenue loss as a result of Brexit to the mix, a rather dismal picture of the industry can be painted,” he said. “Accountancy firms must prepare themselves for a whole range of post-Brexit trading scenarios but one of the best things they can do is tackle productivity issues and rebuild margins.”
One area for cautious optimism lies with technological innovation, he said.
“In particular, digitisation, which for many years has been considered a nice-to-have is now, as result of the pandemic, business-critical for accountancy firms of all sizes,” said Rae. “The government, the regulator, associations, and the industry as a whole are all now behind moves to accelerate digitisation in order to increase productivity and rebuild margins so the firms can weather these storms.”