Merging two accountancy practices

Q: How might an absorption work in practice?

Illustration only. Firm A is an LLP with gross fee income of £600,000. Firm B is a sole practice with fees of £180,000, 250 clients and one employee. B's principal becomes a member of A and B stops trading. A's own clients need no HMRC action; B's 250 clients are written to, sign new engagement letters and authorise A, and B's agent codes are removed. B's principal is approved by A's AML supervisor before joining. Combined fees of £780,000 give an ICAEW minimum PII limit of £1,950,000, and A's insurer agrees to cover B's past work, which meets B's run off obligation for as long as that cover lasts. B's employee transfers under TUPE.

Most mergers of accountancy practices take one of two forms: one firm absorbs the other and keeps its legal entity, or both firms move into a new partnership, LLP or company. That choice decides how much has to be redone. A new legal entity needs its own HMRC agent services account and fresh client authorisations, its owners and managers need AML approval, and the professional indemnity cover must protect the past work of both firms. Clients must be told, and they keep the right to choose their accountant.

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What are the main ways to structure a merger?

There are three common structures, and each has different consequences for clients, HMRC and the professional bodies.

Absorption. The principals of the smaller firm join the larger firm as partners, LLP members or shareholders. The larger firm’s legal entity carries on, the smaller firm stops trading, and its clients are invited to move across.
A new entity. Both firms transfer their businesses into a newly formed LLP or company, and both old entities cease. This can feel fairer to the principals but creates the most administration.
A group. Where both practices are companies, a new holding company can acquire the shares of each in a share for share exchange. The trading companies continue for a period, so clients and registrations do not move on day one.

A merger differs from a purchase because the principals of both firms end up owning the combined business together. Where one side is really retiring for a price, the rules on buying an accountancy practice are the better guide. The commercial terms to settle early are profit shares, capital contributions, the firm name, who leads which functions, how a retiring principal exits and what restrictions apply if someone leaves. The choice between sole practice, company and LLP is often reopened at this point.

Why does the legal entity make such a difference with HMRC?

HMRC’s guidance on changing tax agent businesses says that when agency firms merge, HMRC must be told about the new set up. If one firm merges into an existing firm that does not change legal entity, nothing needs to be done for the existing firm’s clients. For the clients of the firm that merged in, the continuing firm must get authorisation from those clients again and ask the Agent Compliance Team to remove the agent codes of the entity that is no longer trading.

If a new legal entity is created, it must be registered as a business and follow the steps for a change of legal entity: a new agent services account under the new Unique Taxpayer Reference, fresh authorisation from every client, removal of clients who are not moving, and a letter to the Agent Compliance Team to close the old account. HMRC says firms must not try to move agent codes from the old legal entity to the new account, because that breaches the HMRC Standard for Agents and UK GDPR. In practice, absorbing the firm with fewer clients into the firm with more clients keeps the number of reauthorisations down. The mechanics are covered on the HMRC agent services account page.

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Do clients have to agree?

ICAEW’s helpsheet on changes in the composition of a firm says clients are ordinarily clients of the firm rather than of individual principals, but they have the right to choose their accountants and may leave because of a change. Changes in engagement partner or key contacts should be communicated clearly. Where clients do move to a new firm, the change of appointment requirements in section 320 of the ICAEW Code of Ethics still apply.

ICAEW’s guidance on buying and selling fees, which deals with the same transfer of client relationships, adds three points:

client confidentiality must be protected under section 114 of the Code, and the client’s consent should be obtained before the other firm is given access to files;
both firms need a lawful basis to process personal data in the files, and legitimate interests will often be appropriate, with clients told about the change if the privacy notice does not already cover it;
new engagement letters should be obtained, and formal resignation and appointment procedures may be needed for audit, ATOL reporting, insolvency appointments and reserved probate work.

Our page on engagement letters for accountants covers what the new letters should contain.

Which regulatory approvals and notifications are needed?

ICAEW’s helpsheet says a firm that changes structure should check whether it may still use the description Chartered Accountants, whether it is still a member firm entitled to automatic AML supervision through Practice Assurance, and whether it remains eligible for regulated work such as audit, investment business and probate. Firms must notify ICAEW of changes in practice structure, update letterheads and inform their PII insurer as the policy requires.

Two legal rules often decide the timetable:

AML approval. Regulation 26 of the Money Laundering Regulations 2017 says no person may be a beneficial owner, officer or manager of a relevant firm unless approved by the firm’s supervisory authority. Incoming principals should be approved before they take up the role, not afterwards.
Audit control. Under paragraph 7 of Schedule 10 to the Companies Act 2006, a firm is controlled by qualified persons only if a majority of its members, and a majority of any management body, are qualified persons. Merging with principals who are not audit qualified can take an audit firm outside that rule.

How should professional indemnity insurance be handled?

The ICAEW PII Regulations effective from 1 October 2026 tell members to plan in advance: before merging, the principals must make sure the new firm has sufficient qualifying insurance that will also cover the existing firm. The guidance reminds firms to cover past and new principals and predecessors in business, and says each member should make sure cover for historic work is in place when practices merge or split.

Where one of the merging firms ceases, regulation 2.8 requires its principals to have compliant cover for at least two years after cessation and then to take all reasonable steps to keep it for a further four years. The guidance accepts that in some circumstances the new firm’s insurance may cover work done at the previous firm, so the continuing policy should say so expressly. The minimum limit also changes with combined fees: a firm with gross fee income under £800,000 needs cover of two and a half times that income, with a minimum of £250,000, and larger firms need at least £2 million. See professional indemnity insurance for accountants.

What happens to staff and AML records?

Where TUPE applies, GOV.UK says employees’ jobs usually transfer to the new employer with their terms and conditions, and continuity of employment is maintained. The outgoing employer must give the new employer information about the employees at least 4 weeks before the transfer, and both must inform and consult representatives. For transfers completing on or after 1 July 2024, an employer with fewer than 50 employees, or transferring fewer than 10, can inform and consult the employees directly.

Each firm is responsible for its own customer due diligence. ICAEW says a purchaser may rely on the other firm’s due diligence if that firm gives written consent, following paragraphs 5.4.1 to 5.4.7 of the CCAB guidance, and remains responsible for ongoing monitoring. Regulation 39 of the Money Laundering Regulations 2017 keeps the relying firm liable for any failure. See reliance on third parties for AML.

How is a partnership merger taxed?

Statement of Practice D12, section 10, says that where members of two or more partnerships come together to form a new one, capital gains follow the same principles as a change in profit sharing ratios. A partner who gives up part of a share in the old firm’s assets and acquires a share in assets brought in by the other firm may be able to claim rollover relief under section 152 TCGA 1992, restricted under section 153 if less is reinvested.

Under section 4 of D12, the disposal consideration is normally a fraction of the balance sheet value of each asset, which often produces no gain and no loss. That changes if goodwill or property is revalued in the accounts or if partners make payments to each other outside the accounts, both of which D12 treats as consideration. Income tax points on admitting and losing partners are on the partners joining and leaving page.

How might an absorption work in practice?

Illustration only. Firm A is an LLP with gross fee income of £600,000. Firm B is a sole practice with fees of £180,000, 250 clients and one employee. B’s principal becomes a member of A and B stops trading. A’s own clients need no HMRC action; B’s 250 clients are written to, sign new engagement letters and authorise A, and B’s agent codes are removed. B’s principal is approved by A’s AML supervisor before joining. Combined fees of £780,000 give an ICAEW minimum PII limit of £1,950,000, and A’s insurer agrees to cover B’s past work, which meets B’s run off obligation for as long as that cover lasts. B’s employee transfers under TUPE.

What mistakes come up most often?

Creating a new entity without counting how many client authorisations it will need.
Copying agent codes across instead of reauthorising clients.
Letting new principals act before AML approval.
Assuming the continuing PII policy covers the other firm’s past work without written confirmation.
Sharing client files during talks without confidentiality terms or consent.
Revaluing goodwill in the accounts without modelling the capital gains effect.

Solar Protect runs fee protection schemes for accountancy and bookkeeping practices. See how our accountant schemes work or read fee protection schemes for accountants.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.