When a solicitor sells their law firm, the value of work in progress (WIP) often becomes a point of negotiation between buyer and seller. Unlike tangible assets such as office furniture or a freehold property, WIP represents the value of legal work that has been started but not yet billed to the client. Getting the treatment of WIP wrong can cost a selling solicitor thousands of pounds in unnecessary tax or a reduced sale price.

This guide explains how WIP is treated on a law firm sale, how it is valued, and what tax consequences follow for the selling solicitor. We also cover the practical strategies that solicitors use to optimise their position before a sale.

What Is WIP in a Law Firm Context?

Work in progress in a solicitor's practice is the time and disbursements recorded against a client matter that has not yet been billed. Under FRS 102, which most law firms follow, WIP is recognised on an earnings basis once the revenue is reliably measurable. This means that as soon as your firm has done chargeable work for a client, that work has a value even if you have not sent an invoice.

For a conveyancing solicitor, WIP might include the time spent on a property search, drafting contracts, or corresponding with the other side's solicitor. For a litigation solicitor, it could include the hours spent on a witness statement or a court application. In both cases, the WIP represents future income that the firm will realise when the matter completes and the bill is sent.

WIP is distinct from billed but unpaid work (debtors) and from cash in the bank. It is an asset of the firm, but it is an asset that depends on the continued involvement of the fee-earner who did the work. This is why buyers often want to discount WIP or exclude it from the sale entirely.

How Is WIP Valued on a Law Firm Sale?

The valuation of WIP on a law firm sale is not straightforward. There are three common approaches that solicitors and their accountants use.

Cost-Based Valuation

The simplest method is to value WIP at the direct cost of the time recorded. If a solicitor has spent 10 hours on a matter at a charge-out rate of £200 per hour, but the cost to the firm (salary, NI, pension, overheads) is £80 per hour, the cost-based WIP value is £800. This is conservative and often preferred by buyers because it reflects what the firm has actually spent, not what it hopes to bill.

Billable Value (Selling Price) Valuation

Under this method, WIP is valued at the amount the firm expects to invoice the client. Using the same example, the WIP would be valued at £2,000 (10 hours x £200 charge-out rate). This is more favourable to the seller but carries risk for the buyer. The buyer takes on the work of completing the matter and sending the bill, but the value of the WIP assumes the full charge-out rate will be achieved. If the client disputes the bill or the matter settles for less, the buyer loses money.

Blended or Discounted Valuation

Many law firm sale agreements use a blended approach. The WIP is valued at the expected billable value, then discounted by a percentage (typically 20% to 40%) to reflect the risk that the buyer will not realise the full amount. The discount also accounts for the fact that the buyer must fund the ongoing work on the matter before the bill is paid.

For example, if the WIP has a billable value of £100,000, the buyer might pay £70,000 for it, reflecting a 30% discount. This is common in practice sales where the seller is retiring and the buyer is taking over the ongoing client relationships.

Tax Treatment of WIP on a Law Firm Sale

The tax treatment of WIP depends on whether the WIP is included in the sale of the practice as a going concern or whether it is retained by the seller and billed post-completion.

WIP Included in the Sale

If the buyer purchases the WIP as part of the practice sale, the seller receives a capital sum for the WIP. This sum is treated as a capital receipt, not as trading income. The seller will pay capital gains tax (CGT) on the gain, not income tax and national insurance.

This is usually beneficial for the seller because CGT rates (18% for basic-rate taxpayers, 24% for higher-rate taxpayers in 2025/26) are lower than income tax rates (up to 45%). If the seller qualifies for Business Asset Disposal Relief (BADR), the CGT rate drops to 14% in 2025/26 and will rise to 18% from 6 April 2026. The lifetime limit for BADR is £1 million of gains.

However, the seller must be careful. If the WIP is sold as part of the goodwill and assets of the practice, the gain on the WIP is added to the overall gain on the sale. The seller's accountant must allocate the sale price between goodwill, WIP, and other assets in a way that is commercially reasonable and defensible to HMRC.

WIP Retained by the Seller

Some solicitors prefer to retain the WIP and bill it themselves after the sale. In this scenario, the seller continues to hold the client relationship for the purposes of completing the matter and sending the invoice. The income from those bills is treated as trading income of the seller, taxed at their marginal income tax rate.

This approach has two disadvantages. First, the seller pays income tax at up to 45%, plus class 4 national insurance at 2% (if applicable), rather than CGT. Second, the seller must remain registered with the SRA or work through a locum arrangement to complete the matters, which can be administratively burdensome.

There is also a timing issue. If the seller retains the WIP, the sale proceeds for the rest of the practice are lower, because the buyer is not paying for the WIP. The seller effectively defers their receipt of the WIP value until the bills are paid, which could be months after the sale completes.

Mixed Approach

Some solicitors use a mixed approach. They sell the bulk of the WIP to the buyer but retain a small number of high-value, complex matters that they intend to complete themselves. This can work well if the seller is retiring gradually or staying on as a consultant for a transitional period.

Pre-Sale Billing Strategies for Solicitors

One of the most effective ways to manage WIP on a law firm sale is to reduce the WIP balance before the sale by billing as much work as possible. This is known as "billing pre-sale" and it can significantly improve the seller's tax position.

If a solicitor bills a matter before the sale completes, the income is treated as trading income of the firm, taxed at the seller's marginal rate. But the cash received from those bills is an asset of the firm that the seller can either retain (if the sale excludes cash) or include in the sale price. In many practice sales, the seller retains the cash and the buyer purchases the ongoing business, goodwill, and fixed assets.

The key is to bill matters that are sufficiently advanced that the client will not dispute the invoice. Billing prematurely can damage client relationships and lead to write-offs that reduce the firm's profitability in the final period before the sale.

For a solicitor selling their practice, the optimal strategy often involves a combination of:

  • Billing all matters that are at or near completion before the sale date.
  • Agreeing a WIP valuation method with the buyer that reflects the risk and reward of the ongoing work.
  • Structuring the sale so that the WIP is treated as a capital asset, qualifying for CGT treatment and potentially BADR.

WIP and the SRA Accounts Rules

Solicitors must also consider the SRA Accounts Rules when dealing with WIP on a sale. WIP is not client money; it is the firm's own asset. However, if the seller has taken money from the client account as an advance payment for costs (a "paid on account" of disbursements or fees), that money may be client money until the work is done and the bill is sent.

When the practice is sold, the buyer and seller must agree how to handle any client account balances that relate to ongoing matters. The seller should not simply transfer client money to the buyer without the client's consent. The SRA Accounts Rules require that client money is held for the client and can only be transferred to the buyer if the client has given informed consent or if the buyer is taking over the conduct of the matter.

This is a common area where solicitors need advice from both their accountant and their COFA. A COFA compliance specialist can help structure the transfer of client matters in a way that complies with the SRA Accounts Rules.

Practical Example: WIP on a Conveyancing Practice Sale

Consider a sole practitioner conveyancing solicitor selling their practice. The firm has 50 ongoing conveyancing matters at various stages. The total WIP, valued at billable rates, is £150,000. The buyer agrees to purchase the WIP at a 25% discount, paying £112,500.

The seller's accountant allocates the £112,500 as part of the total sale consideration. The seller's total gain on the sale (including goodwill, fixed assets, and WIP) is £400,000. The seller qualifies for BADR, so the CGT rate is 14%. The tax on the WIP element is £15,750 (14% of £112,500).

If the seller had instead retained the WIP and billed it themselves, they would have paid income tax at 40% (assuming they are a higher-rate taxpayer) plus 2% class 4 NI, a total of 42%. The tax on the same £112,500 would be £47,250. The difference is £31,500 in favour of the sale structure.

This example shows why it is essential for solicitors to plan the WIP treatment carefully before entering into a sale agreement.

Common Mistakes Solicitors Make with WIP on a Sale

There are several pitfalls that solicitors should avoid when dealing with WIP on a law firm sale.

Mistake 1: Ignoring WIP in the sale agreement. Some solicitors focus entirely on goodwill and forget to negotiate the WIP. The result is that the buyer either gets the WIP for free or the parties argue about it after the sale, leading to delays and legal costs.

Mistake 2: Assuming all WIP is billable. Not all recorded time will be billed. Some matters may settle for less than the time spent, or the client may dispute the bill. A prudent seller should write off any WIP that is unlikely to be recovered before the sale.

Mistake 3: Failing to get a professional valuation. A solicitor selling their practice should engage a practice valuation specialist to assess the WIP and advise on the appropriate valuation method. HMRC may challenge the allocation of sale proceeds if it appears that the seller has undervalued WIP to shift value into goodwill (which may attract a lower tax rate).

Mistake 4: Not considering the impact on the buyer. The buyer will want to ensure that the WIP they purchase is collectable. If the seller has a history of writing off bills or has poor client relationships, the buyer may insist on a higher discount or exclude WIP from the sale entirely.

How a Solicitor Accountant Can Help

The treatment of WIP on a law firm sale is a complex area that requires input from both a legal-sector-specialist accountant and a solicitor experienced in practice sales. The accountant can model the tax consequences of different WIP treatments, advise on the allocation of the sale price, and ensure that the seller's self-assessment return correctly reports the gain.

At Accounts for Lawyers, we work with solicitors across the UK to plan practice sales, optimise tax positions, and ensure compliance with the SRA Accounts Rules. If you are considering selling your law firm, we recommend speaking to a solicitor accountant who understands the specific challenges of WIP valuation and tax treatment.

For more guidance on related topics, see our guides on partnership versus LLP structures and post-merger integration for law firms.

This article provides general guidance only. Every law firm sale is different, and the tax treatment of WIP depends on the specific facts of the transaction. You should take professional advice tailored to your circumstances before entering into any sale agreement.