What might 2021 hold for professional services businesses?
March 08, 2021
Professional services businesses have found themselves emerging from the challenges of 2020 with more certainty over how the UK and EU will trade together in light of the Trade and Cooperation Agreement, signed just days before the end of the transition period. This, alongside hope that the COVID-19 pandemic will ease as we move through 2021, has shown signs of renewed optimism across the industry.
Financial Management - what can we expect in 2021?
Inevitably businesses will continue to have a laser focus on generating and collecting cash. Some of the trends we are seeing in the market include increased pressure on chargeable hours along with spare capacity from Q2 2020 onwards. Expenses will be controlled, with deferrals of less time-sensitive capital projects and through management of people costs. There is good news though, within many firms lock-up has improved with some noting best performance in recent memory.
Cash-flow management will be key. Many firms are loath to increase credit facilities unless absolutely necessary. There are also known issues obtaining third party funding for Partner capital, where those individuals reside overseas. However, businesses will be mindful that there has been no indication from the Chancellor that there will be tax deferrals similar to the Payment on Account Income Tax and VAT ones seen in 2020.
A new approach to office culture?
Rewind 12 months and many professional services businesses wouldn't have imagined their people working remotely on a near/full time basis. COVID-19 has disrupted the office environment, with leadership acknowledging that five days in the office may no longer be the default. Technology platforms have shown that working remotely can be efficient and secure and with many businesses offering their people a flexible working arrangement, there are a number of items that need to be on management’s agenda in 2021. This includes:
- How does the business sustain a collegiate and collaborative approach to team working;
- How can working from home arrangement be supported, underpinned with robust policies and procedures; and
- How does leadership maintain effective governance, staying true to its purpose and core values.
So now to tax!
Whilst priorities may change over the course of the next 12 months, three key items which all professional services businesses will be considering are:
- Office size, rent commitments and lease terms. We expect more businesses to look at redesigning office space to better enable collaborative working with teams potentially 'dropping in' at times during the week, which may have the effect of creating excess space. The taxation of leases can be riddled with complexities and alongside a focus on tax-efficient expenditure through the availability of capital allowances, property costs will be a key focus this year.
- Working from home arrangements provide individuals with greater flexibility, but give rise to a number of considerations, including how home office costs are funded. However, a more business-critical issue is where individuals work remotely from an overseas jurisdiction. Many professional services businesses have workforces with homes / families across the globe and during 2020 there were many instances of individuals working from their non-home location. From 1 January this year, it’s even more vital that Finance/HR functions are made aware of any individuals providing services from another jurisdiction as soon as possible - only then can they effectively and efficiently manage any respective cross-border working employment, direct tax consequence and immigration requirements, minimising the risk of any adverse penalties or reputational issues that could unfold.
- Governance has never been higher on the agenda, with tax transparency setting the tone. The introduction of several pieces of legislation over the past few years including publication of a Tax Strategy, EU MDR/DAC 6 reporting, Corporate Criminal Offence as well as HMRC's new Business Risk Review process, means tax governance is now at the forefront and sits alongside a business’ wider governance policies.
There's plenty for professional services businesses to think about in 2021, balancing key priorities with the challenges posed by the current lockdown. We expect continued resilience around trading performance, with businesses maintaining flexibility around their people and policies to ensure that they end the year in the strongest possible position.