When you sell your agency, you are not selling the desks, the laptops, or the office plants. You are selling the right to bill clients for ongoing work. Retainer contracts are the core asset in most agency sales. But the way those contracts are treated for tax purposes is rarely straightforward.
Most agency founders focus on the headline valuation and the Capital Gains Tax (CGT) rate. They forget that the structure of the sale, asset sale versus share sale, changes how HMRC treats the retainer income you have already earned and the future income you are selling. This selling your agency tax guide walks through what actually happens to retainer contracts at exit, with real numbers and practical steps.
The Core Problem: Retainers Are Not Stock or Equipment
A retainer contract is a promise. The client agrees to pay a monthly fee in exchange for ongoing services. That promise has value. But it is not a physical asset. It is not intellectual property. It is a contractual right to future income.
HMRC distinguishes between three categories when you sell a business:
- Goodwill, the reputation, client relationships, and ongoing business value
- Tangible assets, equipment, furniture, leasehold improvements
- Contractual rights, specific client agreements with enforceable terms
Retainer contracts fall into the third category, but they are often bundled into goodwill for valuation purposes. This creates a tension. The buyer wants to allocate as much of the purchase price to tangible assets (for capital allowances) and as little to goodwill (which is not deductible). The seller wants the opposite, goodwill attracts Business Asset Disposal Relief (BADR) at 18% CGT, while other asset categories may not.
If you sell your agency as a share sale, this allocation does not matter. You pay CGT on the gain from the shares, and the buyer inherits the company as-is. But most agency sales under £5 million happen as asset sales, where the buyer picks which assets they want. And retainer contracts are almost always the asset they want most.
Asset Sale Versus Share Sale: Which One for Your Agency?
In a share sale, the buyer purchases the entire company. All contracts, all liabilities, all tax history. You sell your shares, pay CGT at 18% (if BADR applies) or 24% (if it does not), and walk away. The retainer contracts stay with the company. No renegotiation needed.
In an asset sale, the buyer purchases specific assets, the retainer contracts, the brand, the work in progress, the equipment. The company still exists (you still own it), but it has no ongoing business. You then liquidate the company and distribute the proceeds. This is where the tax treatment of retainer contracts gets complicated.
Most agencies with fewer than 20 staff sell via asset sale. Buyers prefer it because they avoid inheriting unknown liabilities, a contractor who claims unpaid holiday pay, a client who disputes past work, an HMRC enquiry into a historic VAT return. As the seller, you need to understand how each retainer contract is transferred and what tax applies to the sale proceeds allocated to those contracts.
Why Buyers Want Retainer Contracts Specifically Listed
A buyer paying £500,000 for your agency wants to know exactly what they are getting. If the sale agreement lists each retainer contract by name, with the monthly fee and remaining term, the buyer can:
- Confirm the contracts are enforceable
- Check there are no non-assignment clauses preventing transfer
- Calculate the recurring revenue they are acquiring
- Allocate the purchase price across specific assets
From the buyer's perspective, a retainer contract with 12 months remaining at £5,000 per month is worth £60,000 in guaranteed revenue (assuming no cancellation). They will want that value allocated to a specific asset category, often "customer contracts" or "contractual rights", rather than lumped into goodwill.
From your perspective, the allocation matters because it determines your CGT treatment. If the retainer contracts are treated as goodwill, they qualify for BADR at 18% (for disposals from 6 April 2025). If they are treated as separate assets (like a patent or a licence), they may not qualify for BADR at all, and you pay 20% CGT on that portion.
The Tax Treatment of Retainer Contract Value
Let us use a real example. You run a 12-person digital agency billing £800,000 per year. Of that, £500,000 comes from retainer contracts with an average remaining term of 14 months. You agree a sale price of £600,000 with a buyer.
The buyer's solicitor drafts the sale agreement allocating the purchase price as follows:
- Goodwill: £300,000
- Retainer contracts (specifically listed): £200,000
- Equipment and fixtures: £50,000
- Work in progress: £50,000
Total: £600,000.
You assume all £600,000 qualifies for BADR at 18% (for disposals from 6 April 2025). But HMRC may disagree. The £200,000 allocated to retainer contracts could be treated as the sale of "chose in action", a legal term meaning a right to sue for a debt or payment. If HMRC classifies the retainer contracts as separate assets rather than part of the goodwill of the business, that £200,000 may not qualify for BADR.
The distinction hinges on whether the retainer contracts are "personal to the seller" or "transferable assets of the business." If the contracts are standard terms with no special relationship to you personally, they are likely business assets qualifying for BADR. If the contracts depend on your personal relationship with the client (common in small agencies where the founder is the main contact), HMRC may argue they are personal goodwill, not business goodwill.
This is not a theoretical risk. HMRC has challenged agency sales where the founder's personal relationships were the primary value. In one case, a PR agency founder sold her client list for £150,000. HMRC argued the list was not a business asset because the clients had contracted with her personally, not with the company. She paid 20% CGT instead of 10%.
How to Protect BADR on Retainer Contracts
If you are planning an exit in the next 2-3 years, take these steps now:
1. Standardise your retainer agreements. Ensure all contracts are between the client and the company, not between the client and you personally. Remove any clauses that say "services provided by [your name]." Replace them with "services provided by the company."
2. Build a team around the client relationship. Introduce a client services director or account manager as the primary contact. Move yourself to a strategic role. If the client relationship survives without you, the retainer contract is clearly a business asset.
3. Get a professional valuation that separates goodwill from contractual rights. A good corporate finance advisor will structure the sale to maximise BADR eligibility. They will argue that the retainer contracts are integral to the goodwill of the business, not separate assets.