14 minute read
Sustainability
SMPs and the sustainability agenda
Salvador Marinand Paul Thompsonconsider the emergence of the sustainability agenda and its implications for SMEs and SMPs.
Salvador Marin President, EFAA
Paul Thompson Director, EFAA S ustainability is not just about the environment. The UN Sustainable Development Goals define sustainability as ‘a commitment to eradicate poverty and achieve a sustainable world by 2030 and beyond, with human wellbeing and a healthy planet at its core’ (see https://sdgs.un.org/goals). Sustainable development is a core principle of the Treaty on European Union. It is also a priority objective for the Union’s core policies.
Small and medium-sized enterprises (SMEs) collectively account for a significant, if not majority, share of environmental and social impacts by private sector business. Consequently, SMEs, and the small and medium-sized accountancy practices (SMPs) that provide professional services to them, stand to play a vital role in making economies worldwide sustainable. In this article, we examine the role of SMPs in relation to the sustainability agenda and the implications in terms of capacity and competition. We then look at how the European Federation of Accountants and Auditors for SMEs (EFAA), in collaboration with members like AIA, is helping SMPs to get ready.
Box 1: Role of SMPs in sustainability
summarises the various ways in which SMPs can contribute towards sustainability as explained in EFAA’s ‘Call to Action: SMPs Supporting Creation of the Sustainable Economy’ (see bit.ly/3BlqVzb).
© Getty images/iStockphoto
Implications for SMPs SMPs will need to build the capacity to provide high quality sustainability services as soon as possible. In the coming few years, sustainability reporting and assurance will grow exponentially in its incidence and sophistication. This is especially the case in the EU and jurisdictions, like the UK, that are heavily influenced by EU regulation. In July 2022, the EU finalised its Corporate Sustainability Reporting Directive, which will mandate sustainability reporting for some 50,000 EU companies in the foreseeable future. See Box 2: The key provisions of the Corporate Sustainability Report Directive. And whether SMEs like it or not, they will be impacted as larger companies in their value chain, and banks extending them credit, demand sustainability information to fulfil their own reporting obligations. This is particularly the case with European sustainability reporting standards under development by the European Financial Reporting Advisory Group (EFRAG), the recently appointed technical advisor on sustainability reporting to the EC.
This presents an enormous opportunity to SMPs – to expand the suite of professional services offered to SMEs – but presents an equally large challenge and responsibility, that of building the capacity to provide high quality sustainability reporting and assurance services. SMPs have the necessary core competences and ethical compass, thanks to their robust education and training, their continuing professional development (CPD) and their commitment to an ethical code. But they will need to develop new skills and competences – developing subject matter expertise in ESG and sustainability, as well as honing soft skills, such as their ability to lead and collaborate. They will also need to attract and retain new talent. But more than that: they will need to transform their practice as we discussed at the 2022 EFAA International Conference (see bit.ly/3ePntEj). Building the capacity is key to being competitive in the market for sustainability reporting and assurance services. The market for financial statement audit is highly concentrated in many EU member states with a handful of firms dominating the market. This concentration – which may adversely impact competition and choice and, in turn, quality of service – may be repeated in the market for sustainability reporting and assurance services. Of course, competition will also come from beyond the accountancy sector. There is a rapid growing number of consultants muscling in on the market, some reputable sustainability Box 1: Role of SMPs in sustainability SMPs can support the creation of a sustainable economy in the following ways: 1. Advise on sustainable business practices: SMPs can encourage and advise their clients on how they can adopt sustainable business practices and improve their sustainability performance. This advice may include how to reduce their carbon footprint and how to comply with health, safety and environmental regulations. If they are to provide such advice to clients, then SMPs themselves need to ‘practice what they preach’ by adopting such practices themselves. 2. Adopt sustainable business practices: SMPs themselves have a responsibility to change their way of working so that they become more sustainable. Hence, they need to embrace sustainable business practices. Such practices include reducing their carbon footprint and providing a safe and inclusive place to work. Digital technologies can help; for example, remote working can reduce carbon emissions. 3. Prepare sustainability reports: SMPs have traditionally prepared the financial information and reports, both for management and external reporting purposes, for clients that lack the in-house expertise or capacity to do so themselves. Going forward, SMPs can expect increasing numbers of clients to ask them to also prepare sustainability information and reports. 4. Provide assurance on sustainability information: SMPs sometimes provide audit and other forms of assurance on financial information and reports of clients. Going forward, SMPs can expect an increasing number of clients to seek assurance on their sustainability information and reports.
experts, many without professional training and an ethical compass like the Code of Ethics.
EFAA’s response EFAA is the unique voice for SMPs in Europe, helping to shape policy, regulation and professional standards to ensure they are relevant and scalable for SMPs and SMEs. EFAA also helps SMPs to continually adapt and transform to stay competitive and relevant. Our efforts to help SMPs to play their part in the sustainability space fall into three categories.
1. Advocacy and awareness raising EFAA advocates for the role of SMPs in supporting sustainability, seeking to raise
Box 2: The key provisions of the Corporate Sustainability Report Directive ● Reporting requirements will apply to all large companies, all listed companies (except listed micro enterprises) and non-EU companies with branches or subsidiaries in the EU above certain thresholds. ● Listed SMEs will have an option to use simpler, proportionate standards and the possibility to opt out for two years after entry into application. The Corporate Sustainability Reporting Directive also specifies reporting requirements for listed SMEs. ● Reporting is to be phased in starting with public interest entities PIEs with over 500 employees from 1 January 2024 (first reports to be published in 2025); large undertakings from 1 January 2025 (first reports in 2026); listed SMEs from 1 January 2026 (first reports in 2027; deferral to 2029 possible); and non-EU companies with branches/subsidiaries from 1 January 2028 (first reports in 2029). ● European sustainability reporting standards (ESRS) will take account of the difficulties that undertakings may face gathering information from undertakings in their value chain, especially from unlisted SMEs. The standards shall not specify information to be obtained from unlisted SMEs that goes beyond that required for listed SMEs. ● Reports will need to be subject to independent assurance, from auditors or certifiers, initially limited assurance.
Source: Final text of the Corporate Sustainability Reporting Directive, European Commission, 30 June 2022.
Author bio
Salvador Marín is President of EFAA for SMEs, and his professional background spans practice, global business and academia.
Author bio
Paul Thompsonis EFAA Director and a consultant dedicated to thought leadership and development of the global accountancy profession. awareness of the issues involved. After issuing a Call to Action ‘SMPs supporting creation of the sustainable economy’ in July 2021, we teamed up with IFAC in December 2021 to host a global webinar to alert SMPs to the need to prepare for the sustainability tsunami. We also created a new section on our website ‘SMPs supporting sustainability’ (see bit.ly/3S3fLVj) and a twice monthly e-newsletter ‘Latest from Brussels’.
2. Capacity building EFAA predicted that sustainability reporting would grow exponentially in its incidence and sophistication – going from ‘margin to mainstream’ – and that this would require SMPs to build their capacity to offer high quality sustainability services. In 2019, we joined the INTEgrated REporting for SMEs Transparency (INTEREST) ERASMUS+ Strategic Partnership, a consortium of universities and non-educational partners from across the EU that publishes education and training materials to support integrated reports for SMEs (see bit.ly/3xnQXiP). We use a variety of media to share developments, news and resources on sustainability reporting and assurance, as well as on how SMPs can transform their practices through digitalisation and diversification.
EFAA believes that SMPs have a crucial role to play in supporting the pursuit of sustainability.
3. Policy and standards EFAA is also busy in the policy and standard setting arena. In April 2021, EFAA published a position statement in response to the then proposed Corporate Sustainability Reporting Directive (CSRD). While broadly welcoming the proposals, EFAA expressed some concerns. The final CSRD alleviates many, but not all, of these concerns. EFAA is also an active member of EFRAG’s new Sustainability Reporting Pillar and represents SMEs and SMPs on their Sustainability Reporting Board (SRB), responsible for handing over the ‘core’ set of European sustainability reporting standards in mid-November 2022. EFAA, with input from AIA, has argued that the standards are too complex and burdensome, that SMPs lack the capacity to support SMEs, and urging EFRAG to fast-track development of standards for voluntary use by unlisted SMEs.
EFAA is also insisting on greater representation of SMEs and SMPs on both the EFRAG SRB and International Sustainability Standards Board (ISSB). The ISSB is developing the global baseline and is building scalability into their core standards rather than have a separate standard for SMEs.
EFAA and its member organisations believe that SMPs play a crucial role in supporting the pursuit of sustainability. This presents a significant challenge, opportunity and responsibility. SMPs have proven repeatedly that they can overcome similar challenges, leverage opportunities and fulfil their responsibilities. Equally, EFAA and its member organisations also have a key role to play – by helping EFRAG to develop sustainability reporting standards that are proportional for SMEs, clarify what is required, and embracing the principles of ‘Think Small First’ and ‘Smart Regulation’ and helping SMPs to play their part. EFAA, as the primary and unique voice for SMPs in Europe, calls on SMPs to seize the opportunity by reaching out to their SME clients now. This is the profession’s responsibility, as well as in its own interest. But, more importantly, this is in the public interest. ●
The new era of R&D tax relief
Jen Badger explains the key issues to understand in the new era of R&D tax relief compliance and the value of tax claims preparation.
Jen Badger Operations Director, WhisperClaims
With a more rigorous approach to compliance and new legislations set to come into play in 2023, HMRC has increased its focus on research and development (R&D) tax relief – a fact that should be welcomed by accountancy practices. Those advisers recognised as pushing the R&D tax relief boundaries are likely to face extra scrutiny. This is the perfect opportunity for accountants to expand their range of services, build on existing expertise and develop new understanding to add value for clients and generate revenue in the process.
Nothing to fear Dealings with HMRC are part and parcel of any accountant’s daily activity. So why are the rumours surrounding HMRC’s current focus on R&D tax relief claims taking the industry by surprise? Most trusted accountants are aware of the ‘rogue’ element and the impact that can have on their clients. Therefore, any compliance activity that brings a new level of accuracy and validity to R&D tax relief claims is to be welcomed.
As a trusted adviser, an accountant will already have an in-depth knowledge of the claimant’s business – a great foundation for the R&D tax advice process. The key is to build – or build on – a good understanding of the R&D tax scheme and implement robust processes. Ensure that the practice has advisors who can guide their clients through the qualifying criteria. If the firm needs to develop those skills, it really isn’t that daunting – if you have the right tools at hand to assist.
One of the most important and valuable aspects of this process is working closely with a client to help the business understand the scheme because it is the claimant that must judge eligibility. These individuals know the business, they are competent professionals and they have the in-depth knowledge required to identify innovation within their field. The adviser’s role is to challenge them on the level of innovation to ensure the claim is valid.
Trusted adviser Technology, designed by R&D tax relief experts, already exists on the market to help accountants streamline the claims process and build trust with their clients, pulling on their knowledge with prompts to ensure that the claimant’s work fits the criteria for technical or scientific innovation.
It can also help accountants to be rigorous when it comes to the extent of the claim. For example, very few companies invest heavily in R&D, especially over an extended period. Therefore, a cut-and-paste year-on-year claim is not likely to go down well with HMRC. Using R&D tax claims preparation technology ensures that each claim being submitted for the client is unique.
Companies making excessively high claims, or claims from companies that are not in a sector likely to undertake innovation or R&D, have
© Getty images/iStockphoto
always raised an HMRC red flag. In addition, the value of the claim needs to be proportionate. HMRC will not expect staff members to spend 95% or more of their time on R&D. Any indication that this is the case may result in the attention of the R&D tax relief investigation team. Similarly, a robust approach is required when looking at outside costs, including subcontractors. Only time spent on the technical uncertainties of a claim is qualifying.
The best claims technology on the market will walk the advisor through this process, flagging risks with a red, amber and green rating and building confidence along the way. This presents an opportunity to assess the eligibility and quality of claims before they are submitted to HMRC for review. New legislation From 2023, HMRC’s R&D tax relief claim requirements will increase. Advisors will no longer simply be able to enter a number into the CT600 without supporting justification. HMRC wants information and it will demand that every claim must be signed by both an advisor and a named officer within the claiming company.
Evidence may not have been part of the
R&D tax relief process to date, but for most trusted advisers providing a project writeup to support every claim has been the best practice since the scheme’s inception. In addition to being a far more robust approach, this proactively addresses any queries that
HMRC may have. The process also helps accountants and clients to accurately assess every part of the claim. Supporting evidence typically also includes a couple of representative projects that would make up 50% of the claim value.
At every stage of discussion, it is important to remind the client that R&D tax relief is about innovation. This includes the challenges, how they were addressed, where things went wrong, and how the company overcame the problems. If it is easy, it is not R&D. While it is the client that is the subject matter expert and has the business knowledge, it is the role of the accountant to press for information and ensure the claim is genuine.
Conclusion For those accountants that have yet to embrace R&D tax relief – or those that want to streamline the service delivery to expand the number of claims submitted – it is straightforward to put in place the correct processes using claims preparation technology designed by R&D tax relief experts. Question prompts built within the platform help accountants to tease out the relevant information. Claims can be created faster with in-built flags for any figures that look out of line, such as overstating salary costs. And, if there are additional questions, they can be resolved with quick access to online experts with years of experience in this field.
The increase in R&D tax relief compliance activity should provide accountants with a clear incentive to get involved – or extend existing services. It should deter the less honest advisors and provide genuine, trusted providers who have taken the time to understand both the R&D tax relief scheme and their clients’ businesses with a real opportunity to deliver client value and generate additional revenue.
Clients deserve the best advice available and who is better placed to deliver this advice than their accountants, who are already their trusted business advisers? ●
Author bio
Jen Badger is Operations Director of WhisperClaims with experience in multinational software technology.
