How accounting firms should charge for advisory work

Tolley recently spoke to tax professionals who have already embraced the trend towards offering advisory services to discuss the challenges that firms face to provide higher-value advisory services and the steps they need to take to overcome them.

The Tolley tax thought leadership report gave great insight into the difference between charging for advisory work and compliance work and how to go about it.

As technology and self-service tools squeeze margins on compliance work, accountancy firms increasingly turn to more lucrative advisory services to boost revenues.

HM Revenue and Customs (HMRC) digitisation plans, and increased self-service accounting tools potentially reduce the demand for compliance work when filing tax returns. With that in mind, some accountancy firms have been growing their advisory services to future-proof their practices.

In some cases, that has resulted in firms taking on more advisory work than compliance matters. For example, accountancy firm Grant Thornton UK has seen its share of compliance and advisory work flip around over the past two decades.

At the same time, the increasing complexity of compliance work, even if clients can file tax returns themselves, means many businesses are still seeking compliance-related advice to ensure they do everything right.

One potential challenge some accountancy firms may face is that they have always offered advisory services as part of their broader compliance work but have never charged separately for those services.

Glenn Collins, head of technical and strategic engagement at the Association of Chartered Certified Accountants, says, “What people have generally struggled with is the definition around advisory. Many accountants undertake advisory work, but they don't recognise it.”

For tax professionals, that means clarifying where compliance stops and advisory starts — and understanding how to charge for it.

What is the bottom line?

Accountancy firms planning to increase their advisory services will need to heed their own advice, given the transition from compliance to advisory will increase expenses and overheads while not necessarily leading to immediate revenue gains. An important consideration when deciding to offer advisory services is whether your clients will be willing to pay for the advisory work.

“If they're not, then there's no point,” said Andrew Hubbard, editor-in-chief of LexisNexis' Taxation magazine. “If you've got a portfolio, maybe there's only three or four of those clients who would really benefit from some proper advice that will be paid for. And then that's an economic decision about whether or not you invest in the time for your own training or to recruit somebody to do that sort of work. You shouldn't look at this as a theoretical possibility. Clients have to be earning enough themselves so that the tax at stake is worth advice for.”

Download Tolley's new report: Advicepower! The tax accountants turning to advisory services

If you decide it is worth it for your firm, the shift to advisory work can create challenges around billing. Aside from sometimes giving away advisory services as part of their broader compliance work, firms must get comfortable with billing for value rather than time.

Adrian Young, a tax partner at Manchester and Stockport-based accountancy firm Hurst, says, “Compliance is becoming more commoditised, and therefore it's more about price. Whereas the advisory work is much more about value — what value does this piece of advice bring, rather than what does it cost.”

How to charge for advisory work

Tolley spoke to Young about some of the challenges faced whilst growing the firm's advisory business.

Young says, “We are a medium-sized firm based in the northwest of England, principally in Manchester and Stockport, and we have about 100 people across all lines of services. We originally started as a fairly traditional accountancy audit firm, but our specialist advisory teams have really grown in the last six or seven years to be a significant part of the business.”

“When it comes to advisory work, it's only ever going to be tailored and bespoke and specific, so it's never going to be a commodity,” said Young. “So, while compliance is still ever so important and at the core of what we do, the real opportunities are more on the advisory side.”

While many firms have already moved to fixed fees for compliance work, advisory services can be more challenging to price up, given that each job is unique. Even so, clients will likely demand to know costs upfront rather than leave the clock running.

“For advisory work, it has to be quoted on a bespoke basis because no two cases are the same,” said Adam Brodie, accountancy firm Finerva's co-founder and CEO. “We normally try and do fixed fees rather than hourly billing; we would only charge an hourly rate if we just couldn't get a handle on the scope or the amount of work, and perhaps they needed us to start work pretty quickly. But for the majority of work, we're able to scope out a project and provide a fixed fee.”

Finerva was founded by two PwC London alumni. It focuses on high-growth start-ups such as tech and science-based innovators seeking specialist advice in areas such as share schemes and research and development (R&D) tax credits. “While sometimes early-stage businesses may come to Finerva for compliance-based work, often they are referred work by venture capital investors and other accountancy firms who have portfolio companies or clients who are seeking more specialist advice,” says Brodie.

Whatever way firms decide to bill their clients, it is vital they make clear at the outset when something will be charged as advisory work rather than compliance to avoid any potential disputes later.

“You need to have the appropriate conversation with the client and understand what the breakpoint is for compliance work,” said Glenn Collins. “If you establish the breakpoint upfront, then whatever billing mechanism you are most comfortable with plays from that rather than the other way around. You hear an awful lot of objections if you say to a client you are moving to another type of billing.”

The bottom line is – If you want to charge fixed fees for advisory work, your pricing must be accurate, and clients need to understand where compliance stops and advisory starts.

Tips from experienced tax professionals

• Stop giving advice away for free


“Compliance is really important but make that breakpoint where you can when you're looking at advisory work,” said Collins. “Don't be frightened of dipping your toe in the water and having a look at a lot of those areas or asking yourself the question, how much advisory work have I given away in the past just because I'd regarded it as, or called it, something different.”

• Advisory is not a short-cut to riches


Hubbard says, “You can make very good money giving advisory work if you're good at it and the client feels the benefit from it, but you can also not make money in advisory work if you don't do it properly and if you don't understand the billing dynamics.”