Covid prompts 21% slump in tax advisory revenues

The impact of Covid-19 has seen the UK’s tax advisory market contract by one fifth (21%), more than double the global level of decline, according to a report by Source Global Research

Its analysis shows the global market for tax advisory services now stands at $33.4bn (£27.5bn), a drop of 9% or more than $3bn (£2.4bn) over the year.

In contrast, the UK the tax advisory market has contracted by 21%, down from nearly $4bn in 2019 to $3.15bn in 2020.

Despite the slump, the research indicates global demand for tax advisory work has held up better than other areas of the wider professional services market – in comparison, the global management consulting market shrank by 13% ($21bn) in the last twelve months.

 Source is forecasting that the global tax advisory market will recover quickly, with a growth rate of 7% expected over the coming year.

The research suggests the Covid crisis has changed the shape of the tax advisory market significantly, with M&A activity and international tax work stalling.

It has also hit fee rates which are coming under increasing pressure, with Source indicating this will present a significant challenge throughout 2021.

Just 3% of clients surveyed in March 2020, before the pandemic had truly taken hold, believed that fee rates would fall across the industry; however, by September 2020, that had risen to over 60%. Source said that though the pandemic itself is the biggest driver of this pressure on fees, it is also a consequence both of the growing demand for compliance work which, although complex, is not an expensive, highly specialised service, and clients’ belief that a wider range of tax services have been similarly commodified.

The report shows M&A-driven tax work contracted by 21% in 2020, reducing total revenues from $1.6bn to $1.3bn.

On the other hand, compliance-related tax management fared relatively well throughout the pandemic, despite organisations initially trying to do more of this work in house, with only a 5% contraction in revenues on the back of efforts to shore up cash reserves by taking advantage of tax deferrals and other government support schemes.

Fiona Czerniawska, managing director and co-founder of Source Global Research, said: ‘The pandemic has radically reshaped priorities, with many different concerns all vying for space at the top of the corporate agenda.

‘Finance and tax functions are having to balance the demands of tax compliance with the ability to respond to new and unprecedented risks. That balancing act saw attempts to reduce reliance on external support early in the crisis, only for demand to recover as clients recognised that they lacked the capacity and/or capability to carry out compliance work by themselves.’

The research found the only areas reporting growth in tax advisory work in 2020 were the pharmaceutical (up 19%) and healthcare (up 4%) sectors. 

However, the findings also suggest regulation is becoming an increasingly significant issue in several industries, driving an increase in demand for compliance-related support. The high-tech and telecoms industries experienced significant growth of 22% and 16% respectively, and tax advisory work in the insurance industry also grew by 4%.

Source’s analysis suggests that although the market is set to recover quickly this year, growth is likely to be focused in specific areas.

The continuing pressure on organisations’ own in-house tax functions will contribute to growth in compliance-related work, while once the crisis is over, the area of tax where clients are most likely to increase their use of outside support is compliance (70% of those surveyed said they would increase the use of third parties for doing this work).

There is also likely to be a resurgence in M&A-related tax work, as many expect the prolonged crisis to result in a surge of restructuring and transactions.

Lisa Stott, global lead for tax advisory services at Deloitte, said: ‘We anticipate a higher uptick because the pandemic has caused executives around the world to reflect on what it is they’re trying to achieve within their business.

‘They’re reflecting on whether they have the right strategies, and how to introduce resilience into their business so they can cope more effectively if anything like this happens again.

‘Therefore, a lot of clients are already making decisions about divestments, expansions, and acquisitions to make their supply chains more resilient.’

Global tax advisory market in 2020

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