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Accountancy firm numbers decline as consolidation increases

Nearly 500 accounting firms dropped away last year, ending the start-up boom which saw the number of practices grow to 35,520 in the UK.

11th Jun 2020
Editor AccountingWEB
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Float’s new ‘Accounting for change’ report crunches the latest Official Labour Market Statistics from the Office of National Statistics (ONS) and highlights a downward trend in accounting firms startups.

Up until last year, the number of firms had been on the rise, gaining an average of 1,212 new a year since 2011 to peak at more than 36,000 in 2017.

Float’s CEO Colin Hewitt put this growth down to the rise of cloud accounting, and the digitalisation of tax.

AccountingWEB’s own statto, John Stokdyk, has been tracking similar figures for the past decade and suggested that immediately after the financial crisis, firm formations were driven by experienced accountants who had left larger organisations.

In more recent years younger accountants who may have become frustrated within traditional firm hierarchies took advantage of the lower cost of entry made possible by new cloud tools to set up their own practices.

Float also speculated that lower barriers to entry contributed to the decline of accountancy partnerships, which halved during the past decade from 3,125 in 2010 to 1,745 last year. The introduction of limited liability partnerships in 2014 may have played a part here, but many professional firms also now operate as limited companies.

The steady increases came to a halt in 2017 and nearly 500 firms disappeared from the profession’s grand total since then.

Thanks to the Brexit vote, the economic outlook has not been as encouraging for firm formation since 2016. Yet AccountingWEB has been seeing a lot more contracting and freelancing going on within the profession. Family commitments and lifestyle preferences may be fuelling an increase in part-time/slash accountants who reflect the growing gig tendency in the wider economy.

Bookkeeping surge

But while accountancy firms have been receding, the number of bookkeeping has risen steadily to 6,640 - a 113.5% increase on the 2010 numbers.

According to Hewitt, “We’re in the middle of a technological revolution that represents an incredible opportunity for bookkeepers. Cloud accounting services, smartphones and the introduction of Open Banking mean bookkeepers can scale up like never before.”

Consolidators move in

There’s another possible explanation for the relative decline in the number of accounting firms – consolidation.

In 2018, regional firms looked to increase their geographic footprint and seized the opportunity to build a national brand. Firms like Baldwins have embraced the rise in digitalisation to scale up very rapidly. Small and mid-size firms holding on during the hard times in the hope that things will improve made easy pickings for larger predators.

At the other end of the market, practitioners suffering the unrelenting onslaught of Making Tax Digital, new money laundering regulations and GDPR started to question their future in the profession.

AccountingWEB’s Any Answers section has regularly been peppered with practitioners vowing to draw up their exit plans or crossing their fingers and hoping consolidators would come and find them.

ICAS assistant director of practice Jeremy Clarke said sole practitioners earning between £100,000 to £500,000 would be keener to explore consolidation options with local two-to five partner firms rather than facing the “admin hassle” alone.

Firms profit as consolidation rises

Although accounting firm numbers declined, the fortunes of the remaining firms grew. The number of firms earning more than £100,000 increased from 14,985 in 2017 to 15,630 in 2019 – a 4.35% increase. Concurrently, the number of firms with a turnover under £100,000 decreased 5.4%.

“A lack of growth does not necessarily mean the industry is in poor health,” said Float’s Hewitt. “The UK accounting industry now has a smaller number of more profitable accounting firms, following years of growth at the lower end of the market.

“We witnessed a great accounting boom in the UK this decade, with it being easier than ever to set up and run a new firm. This appears to have tailed off more recently, as we also saw increased market consolidation over the last two years which has contributed to a net reduction in firms.” 

Click here to see the results in full and read added commentary in Float’s ‘Accounting for Change’ report

 

Replies (11)

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By jon_griffey
12th Jun 2020 16:38

I would expect that once furloughing ends and accountants are made redundant in their droves, a great many will start their own practices. This has happened before.

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By wilcoskip
15th Jun 2020 20:37

Quite possibly. But with (delayed, but still) IR35 and a general economic downturn, they might have a tough time of it. Not to mention that starting a practice is tough at the best of times, and these guys and girls will be coming at it from a position of weakness and (dare I say it) desperation.
Still, good luck to them.
Personally, I’m hoping to snap up a good client manager if other firms are laying people off.

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By meadow
16th Jun 2020 11:36

I was looking to retire but all that's on hold at the moment! Maybe there's a like minded person out there that I could hand my clients over to. I do not want another year like this with 3 Januarys!

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By KH
16th Jun 2020 16:13

I was also going to retire this year but, when I sent out my BIG retirement letter earlier this month, I got some horrendous stories back from clients who could not afford to change accountant due to either awful covid19 financial woes, or marital break-ups and wife battering (also brought on or exacerbated by covid19) ... so I'm continuing for another year or two, but with a reduced client list, since I just couldn't live with myself if I left some of these client-friends seriously in the lurch right now ... ........... difficult times that look like they are set to get even worse.

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By johnjenkins
16th Jun 2020 11:49

I think Brexit will see, not the demise, but the downsizing of large concerns. A lot are using covid to already downsize. This will leave a niche for the young go getters to exploit. So the next five years will see the small bookkeeper and small Accountant doing quite a bit of business together.

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Mark Lee 2017
By Mark Lee
16th Jun 2020 16:51

Well done on picking up on the LLPs point Richard. The fall in the number of conventional partnerships could well be explained by a move to Limited Liability Partnership status.

I love the fact that the report is based on research that has used consistent sources over the years and thus seems far more credible than many other such reports I have seen.

I'm curious however whether the figure of a little over 5,000 sole practitioners quoted on p8 of the report picks up on all accountants who operate that way. That figure feels way too low to me.

This leads me to doubt that the official SIC code data picks up on everyone who sets up (or shuts up) as an accountant or a bookkeeper in their bedroom or front room. So I suspect that the real total number of accountancy firms is somewhat higher than 35,000.

The other thing of which I am unsure is whether the change in the SIC focused numbers is replicated across those accountants who are not included in the SIC focused numbers.

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Alastair Barlow
By Alastair Barlow
16th Jun 2020 15:07

I agree on the partnership comment - while the report suggests more people going alone rather than the partnership model, my experience is that they are just more likely to be in a different structure (yet still have the business partner(s) with them). While technology may reduce the barrier, there are huge benefits of 2 - 3 people setting up in business compared to 1, and accountants realise this. The partnership model of old is relatively inefficient and siloed and that's what is being challenged and evolving.

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By NewACA
16th Jun 2020 15:03

I think the drop in new firms is due to incorporations no longer being as tax efficient as they used to be.

I started my firm in 2012 on the back of doing lots of incorporations, it was a tax saving no brainer for most businesses making profits over £30k.

Since 2017, incorporating most businesses doesn't make sense any more and self employed folk generally are happy to do their own tax affairs.

I think it would be a lot harder to start an accountancy firm now that incorporations isnt the "go to" entity it once was.

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By wilcoskip
16th Jun 2020 15:25

Tax-efficiency aside, there's no way I'd put my family and personal assets at risk by running a business non-incorporated. Certainly in a field as ripe for litigation as accountancy.
In general, the majority of new clients we talk to, once they understand the (non-tax) advantages of companies, are happy to incur the extra cost and deal with the extra red tape in order to get the protection that they offer. Many have already formed a company before they ever speak to us - for better or worse they seem to have entered the business consciousness as the go-to way to trade.

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By johnjenkins
16th Jun 2020 16:30

Spot on. I have never understood why every business is not a corporation purely for protection that limited liability gives.

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By ireallyshouldknowthisbut
17th Jun 2020 10:58

We have loads of small accountants setting up round here, many are unqualified coming from a bookkeeping + I will have a bash at your tax POV.

They are not really accountants or set up as limited companies, but doing some work at the lower end that we do. From a straw poll I would say there are at least one or two more like that for all the "proper" firms round my area.

They come and go very frequently, so presumably realising its a bit hard than it looks and £100 tax returns are not really the way to go, but they still nip at your heels when quoting.

Had a quote come back this week for £399+VAT for a sole trader who was expanding and needed some help saying not only was i more expensive out for 5 quotes, I was 4 times what she was paying now. But she wanted to work with me. I stuck to my fee, don't think I will get it!

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