Cost of Living crisis confounds UK economy

One of the biggest bug bears for British businesses and the accounting industry is the complexity of the UK tax system. Despite many promises by successive governments over the last 25 years, the UK tax system has continued to grow in complexity. Brexit has only added to the burden. 

 In 2012 the Coalition Government set up the Office For Tax Simplification. It did not live up to its name and did not reduce the sheer volume of legislation making up the UK tax code. “If anything, each successive Budget has added to the volume of legislation, the complexity of which has created uncertainty and unintended consequences,” says Darren Hersey, senior partner at Simmons Gainsford LLP, a PrimeGlobal member firm. “The result of this has inevitably been further legislation aimed at closing loopholes that were never intended to be opened.” 

Recently, ex-Chancellor Kwasi Kwarteng announced that the Office for Tax Simplification would be closed down. Despite most of the tax announcements in that Growth Plan being reversed by the current Chancellor, the closure of the Office for Tax Simplification still stands and is expected to take place when the 2023 Finance Act receives Royal Assent later this year.  

“It remains to be seen whether the current Chancellor will see this as a priority,” says Hersey. “Early signs suggest that he is more concerned with stabilising markets and reducing uncertainty around taxes, than looking for more radical solutions to problems caused by the tax code failing to adequately keep up with the way in which businesses, and people, operate in a post Pandemic world.” 

Kevin Thomas, partner at Rickard Luckin, an MGI Worldwide member firm, pointed out that HMRC plans for MTD (Making Tax Digital) will trigger an overhaul of parts of the UK tax system. However, this has been delayed yet again until 2026, despite being announced in 2015.” Its continuing deferment is disappointing as its objectives include increased efficiency, simplification and cutting fraud,” he says.  

In October 2022, the UK government announced it would exempt businesses with up to 500 employees ‘from reporting requirements and other regulations in the future’, in a move to extend auditing and accounting filing exemptions currently enjoyed by SME companies with up to 250 employees. Stuart Macdougall, partner at Saffery Champness LLP, a Nexia member firm, feels that the deregulation of reporting requirements will only be a good thing for SMEs and create a healthier environment for them to do business in. “I think it is clear that reducing regulation for SMEs will be a welcome relief for some directors who have felt that the UK regulatory environment has become increasingly expensive, with a seemingly endlessly growing compliance burden,” he says.

Longer-term, Macdougall feels this could make the UK a more attractive place to do business for smaller companies, recognising that the EU currently defines businesses up to 249 employees as SMEs. “However, any changes to regulations will need to be done in an appropriate and balanced manner, given one of the UK’s strengths is its corporate governance, so any changes need to be proportionate,” he says. “As a profession, we are also acutely aware of the demands of investors, and indeed other stakeholders, for increased disclosures and transparency. The bar has never been higher, most recently with regards to ESG. Any changes that reduce reporting requirements in such areas will need to be carefully considered against this backdrop so as not to disadvantage British businesses that are seeking to grow and attract external investment in comparison to their European counterparts.” 

British businesses are going to need all the help they can get over the coming year.  The BCC’s Quarterly Economic Survey (QES) for Q4 2022 shows key economic indicators have stabilised at concerningly low levels, following significant declines in Q3. The survey of over 5,600 firms – 92% of whom are SMEs – reveals business confidence, conditions and sales have stabilised at low levels, while inflation remains the top external factor of concern. Only 33% of firms experienced an increase in sales over the past three months, while 25% of firms reported a decrease in sales and 42% report no change. More firms continued to report decreased cash flow versus increased cash flow. Only 24% of business said their cash flow has increased over the last three months, while 30% have seen it decrease. 

Worryingly, business confidence remains at Covid-crisis levels.  The UK needs 2023 to be a more stable year, according to Macdougall. “I certainly wouldn’t like a repeat of 2022 where we had a mini budget overturned, three Chancellors and Prime Ministers as well as the ongoing impact of the conflict in the Ukraine, and the cost-of-living crisis,” he says. “These issues have severely impacted British business as the country emerged from the pandemic. A year of stability and consolidation would be welcomed, especially when you consider the prospect of a general election in 2024.” 

The UK accounting industry, however, is doing well. “Client demand for our services is increasing, coupled with the forever rising regulatory bar, which consequently is putting increasing pressure on fees because of the requirements to do more,” says Macdougall. 

Hersey disagrees over the fee pressure. He has found that strong customer demand for services has meant that there has been less pressure on fees from clients. “What is less obvious is whether the significant customer demand will continue into 2023," he says. "We have already seen businesses hit with substantial cost increases in materials, energy and staff. With the Government taking steps to suppress consumer demand and reduce inflation by increasing interest rates, it is quite possible that companies facing reduced profits will aim to cut costs where they can. This will inevitably put pressure on fees if there is a prolonged recession.”  

James Pitt, partner at James Cowper Kreston, agrees that audit demand is high and there are a lot of new enquiries. However, he has seen a bit of uncertainty creeping in amongst clients in the last eight weeks as the threat of recession looms. “We are not seeing any real concerns yet but there is definitely hesitancy where there was none before,” he said. 

Like many countries across the world, the local accounting market has been hit by a skills shortage, particularly of auditors and qualified accountants.  Hersey feels this has been exacerbated by the increase in customer demand, coupled with professionals dropping out of the profession post-Pandemic.  

“The larger firms have reacted to changing accountancy regulations by recruiting from mid-tier firms, which has had a knock-on effect through the entire profession,” he says. “Recruitment has been challenging and this has placed a greater emphasis on staff retention by all firms, which has been made harder by the problems caused by spikes in the cost of living. This in turn has meant that firms have had to be agile in their salary structures.” 

As well as a lack of new recruits coming into the industry, the kind of skill sets that accounting firms need has changed dramatically since the pandemic. “The overnight switch to working remotely has forced technology on accounting firms,” says Pitt. “There is going to be more automation in the future, which means we are going to have to do the old job in new ways.” 

“The labour market for quality experienced staff across the key areas of the profession has been extremely challenging,” says Dean Pearson, Kreston Global head of R&D Tax, partner BHP Accountants. “But there are now some indicators that staff may be more reticent to move roles quickly due to uncertainty with the economy. For the past 18 months we have also focussed on developing and retaining our own talent by taking in record numbers of trainees across our services lines.” 

In terms of what clients are demanding, Saffery has seen considerable growth in demand for advice and services in relation to Environmental, Social and Governance (ESG) issues. This has been driven partly by increased and more complex disclosure and transparency requirements - for example the Taskforce on Climate-related Financial Disclosures (TCFD) - as well as rapidly escalating interest in these areas. 

“I do not see this abating any time soon, as companies pursue their net zero strategies,” says Macdougall. “Also, from 6 April 2022, TCFD reporting became mandatory for around 1,300 of the largest UK-registered companies. This is also a focus area for the UK regulator, who will be conducting a review on climate related metrics and targets and how adequately companies’ net zero commitments have been addressed in their financial statements.” 

Private equity firms are stirring up the merger and acquisitions activity locally. Private equity backed firms such as Azets, Gravita, Xeinadin and Cooper Parry continue to grow their businesses and there seems to be a continuing appetite for this, according to Hersey.  The interest shown in the accountancy sector by private equity has also led to independent firms considering their own positions in a consolidating marketplace. 

“However, true mergers are likely to be more about creating synergies, and possibly cost savings, rather than providing exits for existing business owners,” he says. “Recent changes in base rates will increase the borrowing costs that finance these deals. This could lead to a slow-down of activity in 2023, but increasing compliance costs for smaller firms, allied with difficulties in recruiting and retaining staff, will likely mean that there will be no shortage of smaller firm owners looking to find a safe haven for their businesses, and an exit for themselves.”