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

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.

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