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 14% 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 14% (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 14% (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 14% (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.

4. Instruct your solicitor to draft the sale agreement with BADR in mind. The allocation of purchase price should be supported by a valuation report that explains why the retainer contracts are part of goodwill. Do not let the buyer's solicitor dictate the allocation without challenge.

Before you sell, check every retainer contract for a non-assignment clause. This clause says the contract cannot be transferred to another party without the client's written consent. If your retainer contracts have this clause, and most do, you cannot simply sell them to the buyer.

You have three options:

  • Get client consent before completion. This is the cleanest approach but risky. If a client says no, that contract cannot be sold. The buyer may reduce the price or walk away.
  • Use a novation agreement. The client agrees to terminate the old contract and enter a new one with the buyer. This requires the client's active participation.
  • Sell the company (share sale) instead. The contracts stay with the company. No consent needed unless the contract has a "change of control" clause.

Most buyers will insist on seeing the retainer contracts before exchange. If any have non-assignment clauses, the sale agreement will include a condition precedent, the sale only completes if the clients consent. This creates a delay and a risk. If a key client refuses, the deal falls through.

As ICAEW qualified accountants working with agency founders, we have seen deals collapse because the founder did not check the contracts before marketing the business. Do not let that be you.

VAT on Retainer Transfers

When you sell retainer contracts as part of an asset sale, VAT applies. The sale of goodwill and contractual rights is standard-rated for VAT purposes. If your agency is VAT-registered, you must charge 20% VAT on the sale price allocated to those assets.

Using the example above: if £200,000 is allocated to retainer contracts, you must charge £40,000 in VAT on top. The buyer can reclaim this VAT if they are registered. But if the buyer is not VAT-registered (unlikely for an agency buyer, but possible), that £40,000 is a real cost to them.

This is why many agency sales are structured as share sales for smaller agencies. A share sale is exempt from VAT. No VAT to charge, no VAT to reclaim, no cash flow complication.

If you are selling via asset sale, factor the VAT into your price negotiations. The buyer may ask you to reduce the headline price to offset the VAT they will pay upfront.

Work in Progress and Accrued Retainer Income

Retainer contracts often include work that has been done but not yet billed. At the point of sale, you have accrued income, the retainer fee for the current month, earned but not invoiced. This is work in progress (WIP).

In an asset sale, the buyer typically takes over the WIP. You will need to agree a value for it. The simplest approach is to calculate the pro-rata retainer fee from the last invoice date to the completion date. If a client pays £6,000 per month and completion happens on the 15th, the WIP is £3,000.

For tax purposes, WIP is treated as trading income, not capital. You pay income tax on it, not CGT. This is important because it reduces the amount qualifying for BADR. In the example above, if £50,000 of the sale price is WIP, you pay income tax at your marginal rate (40% or 45%) on that £50,000, not CGT at 10%.

Your accountant can structure the sale to minimise this. One approach is to invoice all retainer fees up to the completion date before the sale completes. That way, the income is in your company's bank account, not in WIP. The buyer buys the future retainer income, not the past.

Directors' Loan Accounts and Retainer Prepayments

If clients pay retainer fees in advance (common in agency contracts), the company holds that money as deferred income. It is not yet earned. When you sell the company (share sale) or the contracts (asset sale), the buyer takes over the obligation to deliver the services.

If you sell via asset sale, the buyer will want the deferred income to be transferred with the contracts. You will need to agree a settlement figure. The buyer pays you for the net value of the contracts (future income minus future costs), not the gross retainer fees.

If you have a directors' loan account balance, this becomes critical. Many agency founders take money from the company as loans, then repay them before year-end to avoid the S455 tax charge. If you are selling the company, the buyer will want the loan account cleared before completion. That means you either repay the loan (using the sale proceeds) or the buyer reduces the purchase price by the loan amount.

This is one of the most common issues we see in agency sales. The founder has a £40,000 directors' loan account balance and assumes it will be written off in the sale. It will not. The buyer will demand repayment, and you will need to find the cash.

Practical Steps Before You Market Your Agency

If you are thinking about selling in the next 12-24 months, do this now:

1. Audit all retainer contracts. Check for non-assignment clauses, change-of-control clauses, and personal service obligations. Make a list of which clients would need to consent to a transfer.

2. Clean up the directors' loan account. Repay any outstanding loans. If you cannot repay, agree a formal repayment plan with your accountant before you start the sale process.

3. Standardise client relationships. Move yourself out of the day-to-day account management. The buyer is buying a business, not a job for you.

4. Get a tax-efficient sale structure agreed with your accountant. Before you speak to a corporate finance advisor or a buyer, know whether you want a share sale or asset sale. Know which assets qualify for BADR and which do not.

5. Prepare a retainer schedule. A spreadsheet showing each client, the contract start date, the monthly fee, the remaining term, and any special terms. This is the document the buyer's due diligence team will ask for first.

For more on structuring your agency for a clean exit, read our growth and exit articles. If you are at the early stage of planning, our services page covers how we help agency founders prepare for sale.

Selling your agency is a once-in-a-career event. The tax treatment of retainer contracts can cost you tens of thousands in unnecessary tax if you get it wrong. Get the structure right, get the allocation right, and get the legal paperwork right. Your future self, retired and tax-efficient, will thank you.