The definition of a franchise is an authorisation granted by a company to an individual allowing them to carry out specified commercial activities. Simply put this means a business owner licencing its operations alongside its products, branding, and knowledge in exchange for a franchise fee.
A franchise is a method of distributing these products and services with an established brand trademark with a fee paid for the right to do business under the franchisor’s name. Franchises are proven to have a greater chance of success as they benefit from the reputation of a steadfast company.
Can you claim capital allowances on franchise fees? Read on to find out more information…
Capital allowances on franchise fees
Franchise fees are an important aspect of franchising, and understanding the tax treatment of these fees is crucial for franchisees. The initial franchise fee, which covers the right to use the franchisor’s brand, trademark, and knowledge, is considered capital expenditure. As a result, it is not tax-deductible, regardless of whether it is paid as a lump sum or in instalments. This fee is regarded as the acquisition of an intangible asset called goodwill.
However, franchisees can claim capital allowances on ongoing service fees paid to the franchisor. These fees are considered revenue expenses rather than capital expenditures, making them eligible for tax deductions. Ongoing service fees are typically based on a percentage of sales and cover support, training, and the use of the franchisor’s resources.
Industrial know-how and capital allowances
In some cases, franchise fees may include payments for industrial know-how related to industrial processes, mining, agriculture, or forestry. Industrial know-how refers to proprietary knowledge and expertise that enhances the business operations. When franchise fees encompass industrial know-how, these payments can qualify for capital allowances.
Claiming annual investment allowance
The HMRC annual investment allowance can be deducted from the full value of an item that qualifies. These are known as plant and machinery and are kept to use in the business and include:
- Cars
- Parts of a building considered integral such as lifts, electrical systems, and air-conditioning
- Some fixtures like fitted kitchens
- Alterations to a building to install other plant and machinery
Aside from franchise fees, franchisees can also benefit from the Annual Investment Allowance (AIA) provided by HMRC. The AIA allows businesses to deduct the full value of qualifying items, known as plant and machinery, from their taxable profits. Plant and machinery can include various assets used in the business, such as cars, integral parts of buildings (e.g., lifts and air-conditioning), fixtures like fitted kitchens, and even alterations made to install plant and machinery.
The AIA has a maximum claim limit, which is subject to change over time. As of the current regulations, businesses can claim 100% of the first £50,000 of qualifying plant and machinery purchases each year.
Need a tax accountant in London?
Navigating tax implications, deductions, and allowances related to franchise fees can be complex. It’s advisable for franchisees to consult with a tax accountant or professional who specializes in franchise taxation. These experts can provide tailored guidance, ensure accurate tax compliance, and help resolve any concerns or issues regarding franchise fees and deductions.
Tax Navigator, based in London, offers comprehensive tax services, including VAT return services and expert advice on franchise taxation. Their experienced professionals can handle all necessary documentation, correspondence with HMRC, and ensure precise and efficient VAT return submissions.
By relying on the expertise of tax professionals, franchisees can effectively manage their tax obligations, optimize deductions, and focus on growing their franchise business with peace of mind.