Navigating the world of franchise accounting can be a daunting process. You need to ensure that you comply with your legal tax obligations in the best way possible. However, you’re also entitled to some deductions on the 19% corporate tax rate in the UK but you may be wondering which fees you can add to your tax returns as taxable expenditure. This is especially the case if you’re a franchisee who needs to make a payment of both an initial fee and ongoing monthly fees to your franchisor.
To find out which fees are tax-deductible and which ones aren’t, keep reading below.
Initial fees
The initial fees paid to a franchisor are considered the once-off fee for the right to operate under the parent brand’s name, use their trademarks, goodwill, client base, get training for yourself and your staff, pay for marketing and advertising services, and more. Although the name implies that these fees are paid off once-off at the beginning of the franchisor-franchisee relationship, they can also be paid in instalments over a predetermined period of time such as 10 or 15 years, for example. And this will depend on the franchise agreement that is signed between the franchisor and franchisee to determine the length, scope, rights and obligations of their working relationship.
In accounting terms, these fees are considered “capital expenditure” and you cannot claim for tax deductions on such fees, even if they include legal fees or they are paid in instalments as opposed to a lump sum. This is because “such services are separately charged for in the annual fees,” according to gov.uk.
However, it’s also crucial to note that assets can be classified as tangible and intangible with things like goodwill and trademarks being considered intangible assets. This creates opportunities for confusion and is vital to ensure that the right categorisation of assets takes place to avoid negative tax-related implications.
Ongoing monthly fees
Another frequent payment that franchisees make to the franchisor comes in the form of royalties paid for goods sold or services rendered as part of the wider parent brand which gives franchisees the right to do so. The franchisor is entitled to a percentage of the profits or earnings of the franchisee. And with this, now arises the important question: are monthly franchise fees tax deductible?
In short, ongoing monthly fees are considered a revenue expense. As such, they are considered tax-deductible.
Looking for professional tax accountants in London?
There are numerous tax-related distinctions in respect of whether you are self-employed, a part of an association or a franchisee in a franchisor-franchisee relationship. This is why seeking out the professional services of tax accountants in London is the wise choice to make. From categorising your expenses, income, revenue, assets and liabilities correctly to working out where there is scope and room for tax deductions – you can always trust the expert advice of our team to help you optimise your earnings and business potential as a franchisee and keep your expenses to a minimum for greater returns on your investment.