How Does Brexit Affect Accounting Firms?
The success or failure of any decision often depends, to some degree, on its economic impact. Brexit is no exception. Brexit will continue to impact every industry due to its potential monetary effects and personnel impacts, but some businesses will be affected more than others.
Today, we’re looking ahead at how Brexit will affect accounting firms and accounting departments.
Brexit’s Effect on Accounting Firms
The UK and the EU agreed to the terms of a free trade deal on December 31, 2020, effectively avoiding no-deal consequences. While the agreement removed some uncertainly for accounting firms, it doesn’t mean business as usual.
For accounting firms, the main impact of Brexit will likely be felt through the firm’s clients. According to the Office for Budget Responsibility, UK-EU goods trade volumes fell sharply after the Trade Cooperation Agreement (TCA) went into effect and remain below their pre-Brexit and pre-pandemic levels in 2019. The OBR expects total UK imports and exports to remain around 15% lower than they would be had the country stayed in the EU.
Some accounting firm clients may consider relocating, causing firms to lose their clients and negatively impacting their revenue. Clients may also have their supply chains disrupted by customs checks.
Despite this potential, many accounting firms are optimistic about their position in a post-Brexit world. In fact, a survey from RPC found that 45% of UK-based firms plan on offering more advisory services to assist clients through Brexit’s uncertainty, risks, challenges, and opportunities.
How Will Brexit Affect Accounting Firms?
Brexit created new paperwork and procedures that will impact accounting firms. Some of the main ways accounting firms will be affected by Brexit include:
- Customs processes. The Brexit trade deal ensures tariff- and quota-free trading between the UK and EU member states. However, clients moving goods in or out of the UK will need an Economic Operator Registration and Identification (EORI) number. HMRC automatically enrolled value-added tax (VAT) companies registered and already trade with EU countries. Firms below the VAT threshold need to apply online. Companies without an EORI number will experience increased costs and delays. Customs declarations are required for any goods entering or leaving the UK. Making customs declarations can be complex, so businesses may need to hire a customs agent or freight forwarder or invest in specialized software to handle these declarations.
- VAT. UK businesses and EU countries dealing with the UK need to apply VAT to their trades. Companies registered for VAT in the UK don’t need to pay VAY import tax when their goods arrive in Britain but must account for it on their VAT return. UK companies don’t need to get authorization from HMRC to use postponed VAT accounting, but they do need to include their EORI and VAT numbers on customs declarations. This postponed accounting is advantageous for companies with cash flow issues but will result in additional paperwork for tax filings.
While these issues are more likely to impact an accounting firm’s clients than the firm itself, clients will have an increased need for advice and planning as the new rules add red tape and slow down processes.
How Will Brexit Affect Auditing?
UK companies will need to appoint a UK-registered audit firm to sign audit reports.
Under the Brexit deal, there is no more automatic recognition of credentials and qualifications for many professionals, including accountants and auditors. Some EU countries, including France, Italy, and Portugal, require auditors to be residents of the country to practice. In other countries, auditors may need to requalify.
The Institute of Chartered Accountants in England and Wales (ICAEW) cautions that auditors will need to consider how Brexit-related risks could impact the firms they are auditing. Its guide, Brexit and Audit: Risk Factors, provides a framework for analyzing those impacts.
Implications on Financial Reporting
In the UK, the Brexit transition period ended on December 31, 2020, so financial reporting for years beginning on or after January 1, 2021, needs to follow UK-adopted International Accounting Standards (IAS) rather than the EU-adopted IAS. Initially, those standards will be the same, but they may diverge as each standard-setting body adopts its own accounting standards post-Brexit. This will result in additional complexity for consolidated financial statements of international groups.
UK companies with EU subsidiaries or presence in a European Economic Area (EEA) country will need to comply with the reporting requirements of that state.
The Financial Reporting Council has encouraged companies to be specific about the threats they face from leaving the EU and details of actions planned or taken in their financial statement disclosures.
What Does It Mean for Accountants as Individuals?
British-qualified accountants no longer have a credential that is automatically recognized by all EU member states. Some EU member states, including Italy, Germany, the Netherlands, and Spain, recognize UK accountancy qualifications without restrictions. However, others, including Denmark, France, and Greece, require British accountants to pass an ‘economic needs’ test to work with or in their country.
UK-based accountants and auditors who travel to the EU for work purposes may need a visa or work permit. UK citizens residing in the UK will need at least six months until their passport expires to travel to most EU countries other than the Republic of Ireland. If their passport expires sooner, they must apply for and receive a new passport before traveling.
You can learn more about preparing to travel to the EU at Gov.uk.
Post-Brexit, What Changes in UK Accounting Standards?
Moving forward, any amendments or new International Financial Reporting Standards (IFRS) need to be endorsed by the newly established UK Endorsement Board (UKEB) before applying to UK companies.
Standards around financial services, anti-bribery, and corruption will likely be high on the list of priorities for regulators.
Time will tell whether the impact is a blessing or a curse for accountants and auditors. However, accountants are typically the first call for many business owners and executives when faced with economic challenges. If your accounting firm or accounting department hasn’t done so already, you should assess your workload in the post-Brexit environment and start making plans for it.