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The future UK-EU relationship on professional and business services Contents

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The future UK-EU relationship on professional and business services

Chapter 1: Introduction: professional and business services in the UK

The UK’s professional and business services sectors

1.Professional and business services are an important part of the UK economy. Defined by the Department for Business, Energy and Industrial Strategy (BEIS) as “a range of diverse knowledge-intensive industries and support functions … which provide specialised support to businesses and the public sector”,1 they include (but are not limited to):

“Advertising, legal services, market research, accountancy, architecture, engineering, management consulting, call centres, event/exhibition organisers, credit services, operational leasing and HR/recruitment”.2

2.The professional and business services within this definition accounted for almost 12% (£224.8 billion) of the UK economy’s gross value added (GVA), 13% of the workforce (4.6 million jobs), and 23% of all registered businesses in 2019.3

3.These service sectors are closely linked to the UK’s financial services sector. While we do not consider financial services in this report, the two industries are closely interconnected and interdependent, as Shanker Singham, Chief Executive Officer, Competere, noted: “The ecosystem for financial services is not just banks and investment houses; it is also lawyers, accountants and related professionals.”4

4.This is not just an industry of big firms. Sally Jones, Partner, EY, and Chair of the Professional and Business Services Council’s (PBSC) Trade Technical Group,5 told us that in the “more than 600,000” professional and business services providers in the UK, “the average number of employees is fewer than four”.6 While London is a hub for the industry, it is also spread across the UK. Sally Jones told us that “more than two-thirds of people operating in professional and business services are not found in London and the South East”.7 In 2019, the sector accounted for around 25% of all businesses in Scotland, and 17% of total employment and 12% of turnover.8 Around 15% of Wales’ total workforce were employed in financial and professional services in 2019.9 In Northern Ireland, the broader services sector accounts for 75% of GVA and 80% of employment, which demonstrates the significant importance for the Northern Irish economy of arrangements on the island of Ireland that facilitate UK-EU trade in services.10

Trade in professional and business services

5.Professional and business services are the UK’s leading services export and the PBSC told us that the UK is “second only to the US on the world stage” for trade in this area.11 UK exports of these services amounts to over three times the leading goods export (cars).

Figure 1: UK top five goods and services exports (£billions)12

Source: Department for International Trade, UK Trade in Numbers, February 2020: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/868378/200227_UK_trade_in_Numbers_full_web_version_final.pdf [accessed 5 October 2020]

6.In total, professional and business services account for 32% (£96 billion) of the UK’s service exports and 15% of all UK exports.13 Table 1 provides sector-by-sector data on international trade in professional and business services.14 Table 2 show UK-EU trade in professional and business services.

Table 1: PBS International Trade15

	UK Exports	Share of PBS exports	UK Imports	Share of PBS imports
Other business services, not included elsewhere 16	£34bn	36%	£35bn	55%
Business management and management consulting	£21bn	22%	£1bn	2%
Research and development	£10bn	10%	£4bn	7%
Advertising and market research	£8bn	9%	£8bn	13%
Legal services	£8bn	8%	£1bn	2%
Engineering	£8bn	8%	£3bn	5%
Accountancy	£2bn	2%	£1bn	2%
Recruitment	£2bn	2%	£1bn	1%
Scientific and other technical services	£2bn	2%	£7bn	11%
Architectural	£1bn	1%	£0bn	0%
Operational leasing services	£0bn	0%	£1bn	1%
Total PBS	£96bn		£63bn

Source: ONS The Pink Book 201916

Table 2: UK-EU Trade in PBS

Service	UK exports to EU, 2018	EU Share of UK worldwide exports	UK imports from EU, 2018	EU Share of UK worldwide imports
Legal, accounting, management consulting and public relations	£15,131m	42%	£6,628m	48%
Other business services not included elsewhere	£9,913m	35%	£10,890m	33%
Advertising, market research and public opinion polling	£5,278m	57%	£3,491m	64%
Research and development services	£2,931m	29%	£2,785m	37%
Architectural, engineering, scientific and other technical services	£2,245m	21%	£2,509m	61%
Operating leasing services	£89m	33%	£354m	52%
PBS Total	£37,841m	38%	£27,476m	41%

Source: ONS Trade in Services, January 2020.17

7.Trade in these sectors, including with the EU, is successful and growing. The PBSC said that “export growth for the sector has remained consistently high, with £99 billion of exports and a trade surplus of £33 billion, 30% of the UK’s trade in services surplus overall”.18 Nick Owen, Chairman, Deloitte, and industry co-chair of the PBSC, said that the UK was a “strong and growing market” for the provision of professional and business services exports to the EU, and delivered “about €33.5 billion-worth of advice” to EU clients in the first three quarters of 2019.19

8.The EU is the UK’s largest market for exports in professional and business services, accounting for 37% of professional and business services exports,20 and the sector ran a trade surplus of £12.4 billion with the EU in 2019.21 In comparison, the United States accounted for 28% of UK trade in professional and business services in 2019,22 and the UK has a trade surplus with the US of £10.6 billion.23 In 2019, the UK’s trade surplus in the professional and business services sectors with the rest of the world amounted to £31.8 billion.24 The UK imported £23.8 billion of these services from the EU in 2018, accounting for 25.7% of EU-UK services imports.25 Asked which professional and business services sectors were particularly reliant on the EU market, Sally Jones highlighted audit, accountancy, legal services and management consulting.26 In addition to those services, it became clear that the shape of the UK-EU future relationship will also have a significant impact on the creative industries.

9.The value of these sectors to the UK goes far beyond these figures. The PBSC described a “symbiotic relationship with the growth of the UK economy, playing a crucial role for businesses of every size and in every location across the UK, to grow, become more productive and competitive”.27 TheCityUK described professional and business services, along with financial services, as the “face of British business across the globe”.28

10.Sam Lowe, Senior Research Fellow, Centre for European Reform, emphasised the relationship between these sectors and manufacturing exports, saying that:

“ a lot of smaller SMEs do not think they are linked to the broader global market, but they are. A lot of them service local manufacturers, and because they are servicing local manufacturers their value is, I suppose, generated ultimately through a manufacturing export. The value added from services embodied in manufacturing exports is significant “.29

11.The SMEs addressed in this report are the small and medium-sized professional and business service providers, such as small legal and accountancy firms. In discussions on the future relationship, these smaller services firms tend to be overlooked relative to small goods manufacturers.

12.Throughout this report we consider a number of the cross-cutting issues facing professional and business services companies including the provision of services on a cross-border basis (Chapter 3), rights of establishment (Chapter 4), business mobility (Chapter 5), the recognition of professional qualifications (Chapter 6), intellectual property (Chapter 7), equivalence and regulatory cooperation (Chapter 8) and data flows and digital trade (Chapter 9).

The future relationship negotiations

13.This brief overview underlines just how much is at stake in the negotiations on the future UK-EU relationship. Both sides entered the negotiations in March with high ambition. The Political Declaration on the Future Relationship, agreed in October 2019, had set the tone, calling for “ambitious, comprehensive and balanced arrangements on trade in services”.30 The EU’s negotiating mandate called on the two sides to seek to liberalise trade in services beyond their commitments as parties to the World Trade Organization, and the Government identified professional and business services in particular as a “key interest”, calling for both sides to confer “most favoured nation” status on the other with respect to services trade.31

14.But significant complexities underlie these ambitious objectives. Free trade in services involves people moving across borders, either to deliver or consume services. It requires rights of establishment, so that businesses in one territory can set up offices in another. It needs to be supported by the mutual recognition of standards and qualifications. It requires regulatory cooperation, so that the decisions of regulators in one jurisdiction are recognised as ‘equivalent’ in other jurisdictions, thereby reducing bureaucratic overheads for business. Trade in these services requires that data can move freely across national borders.

15.An added complication is the fact that many of these issues fall outside the exclusive competence of the European Union. For instance, each Member State is responsible for determining the conditions under which nationals of third countries (now including the United Kingdom) are entitled to enter and settle in their territory. The result is that any UK-EU agreement could be subject to numerous ‘national reservations’, which are typically used by Member States to protect particular sectors from foreign competition.

16.Given these manifold complexities, and despite the economic importance of the professional and business services sector, its interests are often overlooked. The former EU Internal Market Sub-Committee, outlined the key issues for non-financial services in a 2017 report.32 But while the financial services sector has continued to make its presence felt in the negotiations, the diversity of the professional and business services sector, and the preponderance of small businesses, mean that it has not been given such prominence in the negotiations.

17.The inquiry that led to this report, which we have agreed as the negotiations between the UK and the EU approach their conclusion, was in part an attempt to rectify this situation. It was evidence-led, and we sought to hear from witnesses across professional and business services sectors. We are grateful to them for their assistance.

18.Our focus has throughout been on the options that would be available as part of a UK-EU agreement: the report does not explore the implications of ‘no deal’. However, in outlining the priorities for the negotiations it is clear how serious a ‘no deal’ outcome would be for professional and business services. We continue to hope that a positive outcome will be achieved in the coming days and weeks.

19.Professional and business services accounted for almost 12% (£224.8 billion) of the UK economy’s gross value added, 13% of the workforce (4.6 million jobs), and 23% of all registered businesses in 2019. But the disparateness and manifold complexity of the sector mean that its interests are often overlooked.

20.Of the more than 600,000 professional and business services providers in the UK, the average number of employees is fewer than four. While London is a hub for the industry, it is also spread across the UK with two thirds of those working in professional and business services based outside of London and the South East.

21.In total, professional and business services provide 32% (£96 billion) of the UK’s service exports and 15% of all UK exports. 6.7. The EU is the UK’s largest market for exports these services, accounting for 37% of professional and business services exports. The UK had a trade surplus of £12.4 billion with the EU on professional and business services in 2019.

22.We make this report for debate.

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