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Write off of initial franchise fee before period ends as no ongoing value, can losses created be used against future trading?

My client bought a 5 yr training franchise, with upfront payment, which we were writing off over the 5 yr period of the franchise.  My client operates as a limited company 'x' ltd trading as 'y' franchise.

After 18 months he was getting no income or business via the 'y' franchise and has written to the franchisor saying that he wishes no longer to use the franchise name.  The client is trying to get similar work though his own name and contacts but no longer wants to be tied into paying the franchisor the monthly %age of all income when it is not derived through the franchise. 

A verbal agreement has been made with the franchisor that my client can cease to operate under the name, but there is no real prospect of my client getting any of his initial investment back.

I therefore wish to write off the remaining franchise value at the end of the 2nd yr as its UEL is now over.  This will create a fairly large loss. (There are already losses brought forward but there are no creditors except for a directors loan so I am not too worried about the trading insolvently aspect.)

Can the loss created be carried forward against future training profits even though they will have nothing to do with the original cost that we are writing off?   I would assume it can as it is part of the same trade but would be grateful for confirmation.

Thank you

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25th Jan 2010 11:07

Correct treatment

Effectively you have carried out an impairment review and as a result are reducing the economic value of the asset to nil, so the treatment is correct from an accounting standpoint (FRS10 for UK GAAP). If you have followed the correct accounting treatment under GAAP, then tax allows the deduction for a limited company, so you will create a trading loss in the period of write off. Please note that if you follow IFRS the treatment could well be different.

My only slight concern is whether the argument about "same trade" could arise? You will need to be sure that X Ltd trading as Y franchise is demonstrably the same trade as X Ltd trading as X Ltd....There is no obvious reason for it not to be the same trade, but be sure you have your facts staright and some evidence now so that you can sope with arguments in the future - which will of course only arise in the event of seeking relief. I'm assuming that any idea of 3 year loss carry back has been looked at and eleminated as an option.

 

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By Anonymous
25th Jan 2010 12:19

Thank you, future trading and timescale of loss relief

Thank you Rebecca.

The accounts fall under the FRSSE so I am happy an impairment review is the correct treatment.

Sadly there are no previous profits to carry back the losses to.

With regard to the trade, both X Limited and the Y franchise offer training and support in sales, management and team development.  X limited will continue to do so but will not do it under Y's banner so will not get work through the Y name, which is where the franchise falls down as none of the franchisees have successfully got enough work through Y. 

I don't know what tangible proof I would need/ could get, examples of training courses run by X Ltd through Y in the past and just by X Limited in the future?

Will it be more complicated by the fact that the director of X Ltd does not currently have enough work to sustain his family so will be looking for a full time job in the meantime whilst trying to develop the business.  It may well therefore be a few years before the losses get relieved.

Thanks again

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