A Guide to Taxes for Franchisees

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Tax guide for franchisees

Originally posted on 21/03/2018. Updated on 25/03/2019.

As the saying goes, the only certainties in life are death and taxes, and just like any other business owner, franchisees have to pay taxes. The franchise fee that you pay to the franchisor doesn't make you exempt from paying your taxes, and HMRC views your franchise in precisely the same way as any independently run business.

Getting to grips with taxes can be tedious and complicated and so there's no wonder they're often left to the last minute to complete. But successful franchises appreciate the importance of understanding the taxes that need to be paid and submitting returns on time.

Heres a handy guide to help you understand your responsibilities when it comes to taxes.

Types of Taxes

The tax you must pay as a franchisee is determined by your trading status.

  • Sole trader: Liable to pay income tax and national insurance contributions using a self-assessment tax return to be submitted online by January 31st each year.
  • Limited company: Youll need to pay corporation tax on your franchise profits. If you take a salary from the business, you must also deduct income tax and national insurance from it, as well as pay employers national insurance contributions.
  • All businesses: Regardless of your trading status, you must register your franchise for VAT if your profits exceed £85,000 a year. You just register online and complete a quarterly VAT return.

What is self-assessment?

A self-assessment tax return needs to be completed by sole traders each year. The return will detail your income and capital gains (profit made from selling certain business assets).

You need to complete a self-assessment for each tax year which runs from 6th April to the 5th April. The information that you provide allows HMRC to calculate how much income tax you need to pay on earnings over your personal allowance.

What You Need to Pay Tax On

When your franchise makes a profit, you can deduct certain things from the total revenue before you need to pay tax:

  • Business expenses: The best franchises invest money into the business so that it can run as smoothly and successfully as possible. Some of the business running costs that you can claim as allowable expenses include staff salaries, clothing expenses, insurance, marketing, travel and office costs, stock and the costs associated with the business premises such as lighting and heating.
  • Capital allowances: You can claim capital allowances when you purchase assets to use and keep within your business, such as equipment, machinery and business vehicles.
  • Annual Investment Allowance: This covers the cost of business assets that have already been bought.
  • Business losses: Once you have deducted all of the allowances, the remaining amount are the taxable profits.

Franchising and Taxes

Essentially, investing in a franchise means you are paying for the rights to operate the business for a set period. Considering this from a tax perspective, the franchise can be classed as an intangible capital asset. When the trading status of the franchisee is a limited company, the cost of this intangible asset can be claimed in the business accounts, spread over the franchise term.

Bear in mind that if you operate your franchise as a sole trader or partnership, you wont be able to get a tax deduction for the cost of an intangible asset. However, where the intangible asset includes shared knowledge from the franchisor relating to industrial processes like mining and agriculture, the franchise fee is eligible for capital allowances. In fact, the franchise fee for the transferral of industrial know-how can be claimed as a capital allowance by limited companies and sole traders alike.

The regular royalty fee that you pay to the franchisor for ongoing services are categorised as operating costs and are tax allowable for franchisees of all trading statuses.

Also, if you operate a home-based franchise, there is scope to claim allowable expenses for a proportion of the costs associated with electric, central heating, council tax, mortgage or rent payments and internet and telephone use.

Be warned that you can only claim for parts of these bills that relate to running your franchise, so you need to identify a reasonable way of dividing these costs between personal and business use.

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The most successful franchises should ensure that their franchisees understand the value and cruciality of record-keeping. For sole traders, you must keep a record of your franchise income and outgoings so that you can accurately complete your self-assessment return. If youre trading as a limited company, youll need the relevant information to complete your company tax return.

The most lucrative franchises keep high-quality records to help the business run more smoothly and to add ease and simplicity to the tax returns process.

Planning for Your Taxes

Taxes are inevitable, its just one of those things. So, by putting the appropriate measures in place to help make the process the least stressful and last minute as possible, it will not only be beneficial to you, but also your franchise as a whole. These simple steps can be followed to make tax returns more manageable.

1. Consult an accountant that specialises in franchising
Tax can be complicated, particularly for franchisees. Therefore, you'll benefit from hiring an accountant to help you. Also, the fees that they charge are classed as a deductible expense, so theres no reason not to take advantage of their knowledge and expertise.
2. Keep records of your accounts
Keeping track of your income and outgoings isnt just good practice from a franchise management perspective, it also makes tax returns easier to complete and ensures that you pay the right amount of tax.
3. Prepare for tax bills
When you hire an accountant, theyll be able to inform you approximately how much your tax bill will be when its due. Having this awareness will allow you to put money aside to deal with your tax bill when it arrives, rather than your accounts being hit with a one-off payment.

Even the most successful franchises worry about taxes, particularly if franchisees have never had to tackle tax returns before. Unfortunately, they are part of being a business owner, but the process doesnt have to be a laborious one. By being prepared, understanding your requirements and ensuring that you meet the deadlines, paying your taxes can be reasonably straightforward and hassle-free.

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