In light of the challenging and fast-moving environment that professional practices are operating in during the COVID-19 crisis, it has been interesting to assess what themes have emerged from the responses of various firms:
Firms have been decisive
Whether through necessity or prompt decision-making, firms do seem to have taken action more quickly than they did in response to other crises, such as the collapse of Lehman Brothers and the subsequent recession in 2008. Clearly, there are significant differences between the two events. The speed that firms responded in 2020 may reflect their relatively weaker position than in 2008, following the uncertainties created by the UK General Election and Brexit. More positively, there is evidence that leadership within firms has been professionalised over the last decade and the ability and quality of the leaders themselves has improved.
Tax deferrals have been welcomed
It is clear from conversations with firms before and after the launch of the UK Government initiatives that the ability to defer VAT payments and the 31 July income tax payment has provided some significant breathing space for firms. However, these deferrals are simply that – a deferral only - and ultimately the liability must be settled. For some, this will mean the significant and difficult payment of income tax paid on behalf of the partners on 31 January 2021 will be even higher. It is possible that some consider this a problem to worry about later in the year, if the firm gets there.
Partners have (rightly) felt the greatest financial impact
Almost without exception, partner distributions have been deferred, some have had drawings reduced and a smaller number have been asked to contribute capital to the firm. Where firms have pushed through pay cuts for staff, it has either been graduated with those on higher salaries bearing the greatest burden and/or with partner drawings impacted the most.
A new word: ’furloughing’
It may be a new concept but ‘furloughing’ will have been discussed at virtually all management meetings over the last few weeks. Broadly, the larger the firm, the less likely they are to have taken advantage of the job retention scheme, though this may have more to do with the reputational impact of being seen to be taking advantage of government support, than the underlying financial strength of the firm. Furloughing has ranged from all staff, to those in hospitality roles through to first-year trainees.
New ways of working
The vast majority of firms have adapted far more quickly and effectively to remote working than perhaps anyone would have expected and certainly more so that would have been possible back in 2008. While the novelty has now worn off, people are starting to assess whether these new ways of working are desirable in the longer term. While many will flock back to an office at the first opportunity, the longer-term impact on the more efficient use of office space may be one of the key legacies of the virus outbreak for professional practices.
Lock-up needs to be under better control
While banks still appear supportive of well-run firms, either through the provision of additional banking facilities or support from one of the government loan schemes, the vast majority of firms would not have needed to consider additional financial support had they managed to control their lock-up more effectively. I take no great pleasure in saying we told you so, but we did. On a more positive note, this is not a train that has left the station and there is much that can be done even now to improve a firm’s cash position. In fact, it is often in more financially challenging times that firms find the way to improve cash collection. Unfortunately, I fear that perhaps unlike different way of working, improved lock-up management will not be a longer-lasting legacy of the environment we are working through at present.
“The mistake is thinking that there can be an antidote to the uncertainty.”
― David Levithan, writer (1972 - )
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.