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Sole trader franchise fees (again!)

I can just about get my head round the idea that the franchisee is buying an invisible asset, the brand of the franchisor - although in my dimwitedness it seems to me that it is really a licence to operate which ought to be tax-deductible over the the course of the agreement.

Never mind, what does irk me is that the training isn't tax deductible either (but would be if the franchisee was a limited company). Where is the sense in that? Am I missing something obvious?
Graham Kemp

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By Anonymous
10th Jan 2007 13:36

Just another anomally
I just view it as one of those absurd anomalies.

There is no doubt that training is an unavoidable and essential business expense of no private benefit, but bizarely is also non tax allowable for the sole trader (or partner) under current practice.

The sort of terminology used to justify the non-allowance is that the individual gains some intangible benefit of knowledge that he or she previously did not have - ie. capital expenditure. [Gaining something that did not exist before is capital].

The only tax relief avenue for a sole trader re: training is "keeping upto date" or perhaps enhancing existing knowledge, or maybe if new regulations arise requiring new qualifications (etc) to continue carrying out existing activities then the expenditure is not gaining new knowledge but preserving existing rights and so tax allowable.

Turning to the limited company, expenditure for training it's employees (directors included) does gain tax relief provided that the training is related to the company's activities.

The way forward to get the tax law fair is for someone to fund an appeal hearing case and see if commonsense prevails over existing stupid theory.
Or, maybe waste time (?) lobbying MPs for a change in the law, perhaps using "in thing" arguements like "by not giving tax relief to UK businesses for training the UK could become less competitive internationally" (assuming that tax relief would be granted for sole ttraders in the rest of Europe).

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10th Jan 2007 17:20

who says tax is logical!...
It's the old 'putting in you in a position to trade' reasoning and not being part of trade itself. I started as a franchisee many years ago and my franchise payment was disallowed by the inspector in person.
I suppose the logic is that up until you actually start doing some business you are not 'in business' and buying a franchise - per se- does not mean you are 'trading'...

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11th Jan 2007 00:07

not much point appealing , Mark...
...it was the courts that came up with this absurdity based on their interpetation of tax statute in the first place!!!
It will need a change in statute to override the precedents.

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11th Jan 2007 09:24

I won one of these ..
but admittedly in quite limited circumstances. Client was a paint sprayer by trade and purchased a franchise for a particular type of "smart" repair system. The fee included 1 week of training on the new paint systems which were needed to use the technique. Deduction was allowed.

Maybe there is a niche here if (a) Person is already trading and (b) Training is simply an enhancement of existing skills. Strikes me that (a) is a matter of planning and timing and (b) is often the case anyway.

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11th Jan 2007 10:25

Steven, there is no doubt....
.......that the training expenditure you claimed was deductible under the circumstances you describe. Interesting that HMRC even challenged it, frankly.
It is ALWAYS worth looking closely at training costs in this way if the person concerned is self-employed. Of course, if he/she operates though a company, it will be allowable without all this nonsense (as Graham notes).

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11th Jan 2007 10:50

I think
they challenged it simply because it was obviously a franchisee (they could see the goodwill element on the B/S). He also started to trade only three months before acquiring the franchise (under my advice) to avoid any argument that this was pre-trading expenditure. He was a trained spayer but prior to this had been employed spraying aircraft for BAE!

I think you can see that without planning this could still be open to challenge. My point was, that many people acquire a franchise in an area that they already have existing knowledge and therefore WITH planning the franchise costs don't have to be all lost every time.

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By Anonymous
15th Jan 2007 14:46

At the risk of testing your patience....
Thanks for your comments, but can I quickly ask for your ideas on the following scenario...
1. Registers as self- employed August 2005 (no previous practical experience in chosen trade)
2. Enrols on very expensive course to teach him his trade October 2005 - consists of a weekend training each month for a year
3. Makes first sale December 2005
The question is, how much of the training is tax-deductible a) 100%, b) 10/12, c) 0% or d) other.
If you are still awake and can bear to contribute, thanks in advance.

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15th Jan 2007 18:08

Some perhaps
When I had a franchise the nice man at Nuneaton tax office did allow a portion of my training costs (about half from memory) as it was ongoing after I started (once a month) and could justifyably be called updating of skills.
As your client's extends into his actual trade there should also be a portion of 'ongoing' training.
Or ask yourself what the cost of the initial training would be if no other took place and then deduct that.

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15th Jan 2007 19:37

well, Graham,,,,
awake but.......
Unfortunately most franchisors are very greedy and lazy about all this. They know exactly what the situation is, and are subject to tax on all the income, but for self-interest make little or no effort to structure it so there is a "mirror" impact and that the franchisee can claim most of the fees as expenses. They want to ensure the franchisee cannot get off the "hook" of paying all the upfront sums (the greedy bit) and they cannot be bothered to do some things which would NOT put their money at risk but give franchisee better shot at getting stuff allowed (the lazy bit).

In your specific case, it will depend on the exact contract wording (which could well be unhelpful, but there is always hope, so read carefully). Given the circumstances (and given that the only black and white answer might well be 0%), I would go down the route (so long as it is not in clear contradiction of the contract and other facts) of arguing that say 10/12 (or whatever you can justify) of the training is building on initial knowledge gained from the pre-trading course and from actual trading knowledge. It is unlikley to be clear-cut, but it gives you a justification and a reasonable base from which to debate with HMRC should they take a different view.

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