Unleashing the UK's creative side - and how the Government can help both the industry and its own coffers

Last month was the Cannes Lion festival in the south of France, which is the premier advertising conference in the world and where the great and the good (which does not include myself) gather to discuss what is happening in the advertising world. One noticeable feature of the week was X owner Elon Musk’s fireside chat with WPP CEO Mark Read. Yet another, for me, was the presence of the large poster on the main Palais de Congress highlighting the UK importance to the global advertising industry. The UK is a global powerhouse in the area. We should celebrate that fact. But there is also something very tangible the UK Government can do to support the industry which will both boost its standing - and the government coffers at the same time.?

First some numbers. According to work prepared by think-tank Credos for the UK Advertising Exports Group, the UK exported ￡18bn of advertising services in 2023 using data supplied by the ONS (https://adassoc.org.uk/credos/uk-advertising-exports-reach-18bn-in-2023/ ). That is up 15% year on year and four times what the sector exported a decade ago. The UK is now the second biggest exporter of advertising services in the world after the US and has closed the gap with the US from $4.7bn to $3bn. To put in context, the UK exports more in advertising services than it does in engineering, telecommunications, legal, accounting, audio-visual, or architectural services. The US is the biggest single market for?

There is also the size and structure of the UK advertising market itself. According to data from the Advertising Association (AA) and WARC, total UK advertising spend was ￡36.6bn in 2023 (https://adassoc.org.uk/our-work/uk-advertising-reports-36-6bn-spend-in-2023/#:~:text=London%2C%20April%2025%2C%202024%3A,in%20the%20last%2014%20years .). It is hard to estimate the total number of jobs employed across the advertising ecosystem simply because one has to take into account not only advertising agencies but jobs in both directly impacted (e.g. the media) and indirect ones (e.g. suppliers) but the Interactive Advertising Bureau (IAB) estimates that digital advertising alone supported two million jobs in the UK. Moreover, the UK is the headquarters of one of the four major global agency groups (WPP) as well as a plethora of other agency groups, and is recognised - with New York - as one of the two global hubs of advertising creativity.?

So advertising is important to the UK economy but how can the Government - the existing one or a new one - help? There is the general support the Government can do as it has done for many years but there is one specific area where the Government’s support may be vital, and which - as I mentioned at the start - may help its own coffers significantly.?

The International Accounting Standards Board recently released a consultation paper on possible changes to accounting standards (https://www.dhirubhai.net/posts/ianwhittakermedia_ap17c-intangible-assets-project-commencementpdf-activity-7186674334843719680-I5Yg?utm_source=share&utm_medium=member_desktop ). One related to whether IAS 38 should be changed so that advertising spend can be capitalised and its Profit & Loss impact spread over multiple years - as Plant and Equipment is, for example - instead of being expensed all in one year, as currently happens.?

For what it is worth, I think the accounting standards in this area are illogical, partly because advertising is clearly an investment and so should be treated as such but even more so because when one firm acquires another, the acquired firm’s brands are capitalised on the balance sheet as goodwill. So the standards do not even treat advertising spend equally. More to the point, though, the UK Government should get behind this proposal fully and vociferously for the benefits it will bring to the economy and itself.?

The first is the boost it will give to the advertising sector generally. The principal reason why advertising spending is vulnerable to cuts in a downturn is because it is all expensed in one year making an easy target for firms wanting to meet profit targets as quickly as possible. If these costs are instead capitalised, then the incentive for firms to cut spend to meet profit targets is much reduced because they cannot get the same short-term boost to profits - if spend is capitalised and then depreciated over five years, for example, then the immediate boost is only one fifth as if the spend was expensed, a huge reduction.?

The second is, by treating advertising as an investment not a cost, it changes the narrative around how advertising is perceived and so likely leads to greater spending overall. It is hard to put a quantifiable figure on this. However, it is worth noting in a survey of financial analysts and investors carried out last year for the IPA and included in a report I co-authored, the strength of a firm’s brand was cited as the most important factor in determining the strength of a company by finance professionals at 79%, ahead of such factors as leadership quality and reported profits. That should give a signal as to how advertising should be treated.?

The first two reasons should benefit the advertising industry directly - and fuel its exports, support its jobs and make it more resilient in the face of a downturn. However, the third point relates directly to the Government’s own coffers.?

Because advertising is currently expensed, it reduces profits and therefore reduces the overall amount of tax that a firm pays. However, if the spend was capitalised and then depreciated, then it should boost the stated profits of a company - and also the amount the Government can take in tax.?

Again, there is no hard rule on how much this will generate but let’s use the AA/WARC numbers cited above. Let’s assume the ￡36.6bn of advertising spend is capitalised and then depreciated over five years. That means that, overall, instead of profits being reduced by ￡36.6bn, then - in year 1 - that figure drops to c. ￡7.3bn. At a UK corporate tax rate of 25% for larger companies, that means an extra boost to tax revenues of just under ￡6 billion in Year 1. That boost declines in further years as the depreciation schedule starts to catch up with the payments but, on a rough calculation, the tax boost would be around ￡20 billion over five years on an assumption the advertising market grows at 4% per annum.?

Of course, smaller businesses pay a lower corporate rate and there is the question of reliefs and so on, but the general principle holds. Moreover, the figures above do not take into account the extra tax revenues that would be generated whether through exports, income tax via additional jobs and so forth and / or the boost to the UK’s advertising sector in general, which would boost this number. This is a no-brainer for the Government. It should seize the opportunity with both hands.?

As usual, this is not investment advice.?