Tax and Accounting Implications of Merging With Another Creative Agency

What creative founders need to know before saying “I do” to another studio.

When two creative agencies decide to join forces, the focus is usually on big ideas: bigger clients, stronger portfolios, shared talent and finally cracking that “we should collaborate more” energy.

But beneath the brand refresh, team intro videos and optimistic Slack channels sits something just as important: tax and accounting consequences.

A merger can unlock huge opportunities, if you structure it properly. Get it wrong, and you risk unexpected tax bills, messy profit splits, and HMRC headaches that could take all the gloss off your new partnership.

Here’s a clear, creative-friendly guide to what actually happens in the numbers when two agencies combine.

1. What do we even mean by a “merger”?

In the UK, agencies don’t typically “merge” in the Hollywood sense. Instead, one of these structures is used:

A. One company buys the shares of the other (share acquisition)

– The acquired company becomes a subsidiary
– Or is later wound up and fully absorbed into the group

B. One company buys the trade and assets of the other (asset purchase)

– Clients, team, brand, equipment and goodwill transfer across
– Seller usually pays corporation tax on the gain

C. Both companies form a brand-new company and move their businesses into it

– Often called a “Newco merger”
– Can be very tax-efficient if structured with share-for-share exchanges

Which route you choose drives the tax outcome, so the accounting discussion starts here.

2. Corporation Tax: what HMRC cares about

Share Purchase

If you buy the shares of the other agency, there’s no immediate corporation tax impact for the buyer company.
But the selling shareholders may pay Capital Gains Tax (CGT) on their shares (more on that later).

The buyer gets no tax deduction for “goodwill” when buying shares. The goodwill sits in the balance sheet of the acquired company and is not amortisable for tax.

Asset Purchase

This is usually more favourable for the buying agency from a tax point of view.

You can typically claim:

• Capital allowances on equipment

• Tax-deductible amortisation on purchased goodwill (subject to post-2016 restrictions)

• Expensible costs like rebranding, restructuring, website updates and onboarding suppliers

The selling company pays corporation tax on any profit made on the assets sold, including goodwill.

3. VAT implications: easy to miss

If you’re buying the trade and assets, the transaction might qualify as a TOGC (Transfer of a Going Concern).

If it qualifies as TOGC:

• No VAT charged on the sale

• Buyer steps into seller’s VAT position

• Must keep the business running as a similar type of agency

If it doesn’t qualify:

• VAT must be charged on the asset sale

• This can seriously affect cash flow if the buyer isn't on a fully recoverable VAT position (e.g., some production studios with exempt outputs)

Key creative-sector trap

If the seller has partially exempt work (e.g. music royalties or licensing income) the buyer may inherit that VAT complexity. Worth checking early!

4. Employees: TUPE and payroll implications

Most agency mergers trigger TUPE (Transfer of Undertakings (Protection of Employment)).

This means:

• Staff automatically transfer

• Their length of service continues

• PAYE references may need switching

• Holiday balances, overtime, bonuses, and commissions must all be honoured

• Existing pension schemes must be matched or kept

You’ll also need to budget for:

• Possible harmonisation of salaries

• Overlapping roles

• Redundancies (if restructuring)

5. Creative assets & intellectual property (IP)

This is where creative agencies differ from “normal” businesses.

You must map out:

• Copyright ownership on previous work

• IP clauses in client contracts

• Rights transfer for brand, website, pitch decks, templates and content libraries

• Software licences (Adobe, Figma, stock libraries, plugins)

From an accounting standpoint:
Transferred IP sits with the buyer as an intangible asset, with possible tax-deductible amortisation if paid for as part of an asset deal.

6. Goodwill: the tricky bit

When a creative agency is acquired, most of the value often sits in:

• Brand reputation

• Client list

• Retainers

• Processes

• Team culture

This bundle becomes goodwill.

Tax treatment

• Purchased goodwill may be amortised for corporation tax relief (depending on when created and whether it’s “relevant business assets”)

• Internally generated goodwill cannot be capitalised or amortised

You need a proper valuation otherwise HMRC may challenge it.

7. Capital Gains Tax for the founders

If you sell your shares or business:

• You may pay CGT at 10% or 20%, depending on eligibility for Business Asset Disposal Relief (BADR)

• BADR requires 2 years of shareholding, officer role, and trading status

• If selling shares, CGT applies personally

• If selling assets, corporation tax applies to the company, and then extracting cash creates a second layer of tax

This is where proper structuring makes a huge difference.

8. Post-merger accounting: the messy middle

Once merged, the real work begins:

You may need to:

• Align accounting policies (FRS 102 vs FRS 105, revenue recognition, WIP treatment)

• Consolidate group accounts

• Revalue assets

• Re-map the chart of accounts

• Reset budgets, KPIs, and cashflow forecasts

• Review pricing, margins, and utilisation rates

• Integrate your Xero files and processes

This is why many founders hire an external accountant to run “Integration Month 1” to stabilise the finance operations.

9. Profit shares and director remuneration after a merger

If two founder teams merge, a key decision is:

How will profits be shared going forward?

Options include:

• Fixed salaries + dividends based on shareholding

• Variable profit shares

• Earn-out arrangements (common where one agency is much larger)

• Deferred consideration (paid over several years)

Each option has different tax consequences:

• Dividends vs salary

• Employer’s NIC

• Cashflow strain

• Corporation tax timing

• HMRC valuation concerns on earn-outs

Get this documented properly. Verbal agreements fall apart fast.

10. Should the merged agency become a group?

Some creative agencies choose to run as a group structure, keeping each brand or subsidiary separate.

Pros:

• Simplifies selling one part of the business later

• Ring-fences risk

• Allows different creative verticals to operate independently

• Tax-efficient movement of cash via group relief rules

Cons:

• More accounting

• More admin

• Three sets of filings instead of one

• Harder to explain to clients and suppliers

Final Thoughts: Merging is exciting, but the numbers matter

A merger can be game-changing for a creative agency. More talent, more clients, more clarity, more momentum.

But structurally it must be done right.

Get the legal, tax and accounting decisions sorted early, and your merger will feel like a natural evolution, not a stressful reinvention.

If you're even thinking about merging with another agency, you might want to explore:

A tax-efficient merger strategy

• Valuation of both businesses

• Earn-out structures and founder incentives

• Xero migration and process integration

• TOGC and VAT checks

• Post-merger forecasting to ensure the numbers stack