Your Go-To Franchise Tax Guide
Tax is a confusing matter and as a franchisee, you’ll need to make sure you’re on top of your taxes to avoid the costly wrath of HMRC. Here, we break down everything you need to know about tax when operating as a franchisee, from setting yourself up as self-employed to the additional taxes you’ll need to pay as a self-employed business owner vs an employee.
As an employee, it’s likely the only time you’ve given your taxes a thought it to have a moan about how much you’re paying. But now you’re a franchisee, not only will you need to pay tax, you’ll need to make sure you’re paying exactly the right amount, or you could get into serious trouble with HMRC (the government body that handles tax in the UK). Get it wrong and you could face fines of thousands of pounds, which could put you out of business before you’ve even had a taste of success.
Don’t worry if you’re finding it all a bit confusing though – you’re not alone. Speaking to the Financial Times, Bill Dodwell from the Office of Tax Simplification (OTS) said,
“Too many self-employed people find it hard to understand tax and comply with [the tax system] so they end up having compliance failures and all the cost and worry that comes from that.”
So, to help you get your head around paying and managing tax as a franchisee, we’ve complied one easy-to-read go-to guide. Read on to learn everything you’ll ever need to know about paying tax as a franchisee.
Does my franchise fee include tax?
No. The fees that you pay to your franchisor give you the right to use its business model, logos, brand name and other attributes that it’s worked hard to develop over the years. Think of it a bit like a subscription fee that gives you access to all of the unique branding, support and industry knowledge that your franchisor has.
This will ultimately give you a massive leg up when starting your business when compared to going it alone. In the eyes of HMRC, franchisees are self-employed. The only difference is, you’re using someone else’s business model to help you fast-track your way to success.
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Paying tax as a franchisee
The tax you must pay as a franchisee is determined by your trading status. When you first become self-employed as a franchisee, you’ll need to register yourself with HRMC as a ‘sole trader’. The only exception is if you’ve made less than £1,000 from your self-employed venture (for example, if you sell the products of your knitting hobby on a very casual basis).
This isn’t generally applicable to franchisees, as hopefully you’re going to make much more than this during your business journey. You’ll need to submit a tax return at the end of each year outlining how much you’ve earned, which will determine how much tax you ultimately pay. (More on this later …)
If your business grows into a bigger operation, as hopefully it will, it’s wise to register it as a private limited company. This will separate your franchise’s assets from your own and will protect you in case anything goes south financially. It will also make it easier to manage your company and personal finances separately.
You will become the ‘director’ of your own enterprise and this will also make it easier to sell your operations should you wish to in the future, as it will be neatly organised and exist entirely separately from yourself.
What is a self-assessment tax return?
Once you’ve registered as a sole trader or as the director of your own limited company, you’ll need to complete a self-assessment tax return. The return will detail your income and capital gains (profit made from selling certain business assets) over the course of the tax year. You’ll need to fill this in by the end of October if you’re filing it in paper, or by the end of January if you’re completing it online.
The self-assessment tax return looks at how much you’ve earned over the course of each tax year (which runs from 6th April to the 5th April). HMRC will then use this information to work out how much tax you owe. Make sure you’re always keeping back a good chunk of your profits (at least 20-30%) to make sure you can pay your tax bill. Register and find out more about self-assessment tax returns here.
How much can I earn before paying tax?
The standard tax-free Personal Allowance for everyone in the UK is £12,500, regardless of whether you’re self-employed as a sole trader or an employee. Any net profit you make above this, combined with any other source of taxable income (totalling less than £50,000) will be taxed at 20%, the basic income tax rate.
If your net profit is above £50,000 but below £150,000, you’ll pay 40% income tax on everything above £50k. Finally, if you’re doing really well and are bringing in more than £150,000, you’ll pay 45% tax on all income above this threshold.
You’ll also need to pay National Insurance contributions if you’re bringing in more than £6,365 per year. The ‘class’ of your contributions (how much you pay) will vary depending on how much you’re making as a sole trader.
If you decide to incorporate your business and run it as a private limited company (PLC), you’ll pay 19% Corporation Tax on all profits. This will fall to 17% in 2020, though. You’ll need to pay your corporation tax within nine months of the end of your accounting period and file a dedicated Corporation Tax return to HMRC, as well as work out how much of this tax you should be paying.
As the company’s director, you can get your income through dividends, provided your business has good enough cash flow. You don’t pay tax on the first £2,000 of dividends and the tax you pay on anything after this will be determined by which income tax band you fall into. Read more about this here to work out exactly how much you’ll need to pay. Finally, if you have employees, you’ll need to pay employers’ National Insurance Contributions, which are 13.8% of income for all employees earning more than £166 per week.
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What about VAT?
Regardless of your company’s legal structure, you must register your franchise for VAT if your turnover exceeds £85,000 for the year. You just register online and complete a quarterly VAT return. This is separate to the NI contributions and income tax that you’ll pay through your regular tax return. Once you’ve registered for VAT, your business will need to charge the right amount of VAT for all your products or services. Find out how much you should be charging your customers here .
Working out tax-deductible costs
There are certain things that you’re able to deduct from your business’ total revenue that can decrease how much tax you pay. These include:
• 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.
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. This is a tricky and complex area though, so it’s often best to seek the advice of an accountant to make sure you’re approaching it the right way. Learn more about this here.
Making tax returns easy
There are a number of things you can do to make your self-assessment tax return much easier to complete.
- Keep records of everything, including your income, outgoings and tax-deductible expenses.
- Note which invoices have been paid and which are outstanding to work out the income you’ve actually received when you come to do your tax return.
- Track your income regularly throughout the year, rather than waiting for tax-return time to do a year’s worth of work.
If you’re still baffled and don’t know where to start, speak to an accountant. It’s their job to be clued up on tax, so they’ll be able to tell you exactly what you need to do to stay on the right side of HMRC. If you can, speak to one with experience in the world of franchising, as they’ll have an in-depth understanding of any niche considerations for franchised businesses.
Managing your taxes as a franchisee
Tax seems complicated at first glance, but it really doesn’t need to be scary if you’re taking steps to manage your accounts throughout the year. Even if you haven’t been, a meeting or two with an experienced accountant will help you sort out the mess and set out better methods for the future. Want to learn more about the technicalities of being a franchisee? Read our dictionary to get your head around the most common business terms.
Sophie Cole, Point Franchise ©
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