Top 50 - treasury plugs leaky finances at firms' cost

Despite the government making clear its intention to crack down on tax avoidance, accounting firms have generally managed to maintain a steady income stream from tax advisory services over the last year, according to the Accountancy Age Top 50. But with Gordon Brown leading the crackdown on anti-avoidance schemes, will the good times last?

Most of this year’s top 10 firms have maintained or grown their income from tax work, with just two of the Big Four firms ­ PricewaterhouseCoopers and Ernst & Young ­ seeing a drop in tax as a source of revenue. PwC is hanging on to the tax advisory top spot with income of £476m, despite being down from £495m last year, while E&Y has suffered a 6.3% hit in tax work earnings, which fell from £287.6m to £270m.

The other Big Four firms are performing better in the tax arena, with Deloitte improving by 2% to £385m and KPMG increasing takings from £267m to £277m.

The real growth in tax advisory earnings ­ this year’s star service line ­ comes in the mid-tier, however, where some firms are recording double-digit growth in tax work. Shortly before its acquisition of Numerica’s Southampton, Bristol and Manchester offices, BDO Stoy Hayward reported tax income increases of 20% from the £54.3m it earned in 2004, while listed accounting firm Tenon saw an impressive 28% increase in its tax accounting work, bringing home £25.5m. Grant Thornton, (6%) and Smith and Williamson (6.6%) also saw tax work growth.

The growth in tax advisory work in the mid-tier comes after Grant Thornton, and BDO Stoy Hayward in particular, led the larger second-tier firms in a challenge to the dominance of the Big Four in tax advisory work.

The mid-tier firms have been eager to push their credentials as legitimate alternatives to the Big Four, and their growth in tax work indicates they may be improving their success rate when competing for contracts.

But, the mid-tier has a chasm to cross if it is to truly compete. E&Y has the smallest income from tax work within the Big Four, but it is still greater than the combined tax revenues of Grant Thornton, BDO Stoy Hayward, Baker Tilly and Smith Williamson.

The real challenge going forward for both the Big Four and the mid-tier, however, will be to sustain tax advisory earnings in the face of government’s onslaught on avoidance.

A slew of anti-avoidance measures came into effect in this year’s March Budget. Many firms had already finalised their accounts by this time, and others were close to their year-ends, which would have shielded them from the full-impact of the new rules.

But with the UK government having now effectively closed most loopholes, firms may be hard-pressed to provide clients with avoidance schemes they are willing to pay for.

In the US, meanwhile, firms’ enthusiasm for taking on tax work may have been suppressed by the Department of Justice’s decision to consider bringing charges against KPMG for tax schemes it sold to clients in the late 1990s. Such caution might ripple across the pond, which could see firms treading more carefully when pitching tax schemes.

For now, though, the tax advisory market remains steady, with the real challenges for tax advisers lying ahead.