Incorporation and Franchise

Incorporation and Franchise

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Partnership client purchased a franchise last year, and now wants to incorporate. Partnership currently get no tax benefit from the franchise fee (all goodwill).

Assuming the franchise period is 5 years and there is 4 years left, can the partnership sell the remaining franchise fee (4/5) to the company? Dr intangibles, cr DLA? Franchise fee to be written off over the next 4 years.

It's not the usual goodwill valuation problem which arises on incorporation. Would there be any challenge from HMRC?

Any thoughts would be appreciated.

Thanks.

nick goddard

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By edwincrump
20th Oct 2005 10:17

franchise fees on incorporation
If the present partners are the holders of the
franchise I think I would seriously consider the partners allowing the ltd.co.to use the trading name and the benefits attaching thereto under a (properly drawn-up) licence agreement under which the ltd.co. pays its fees (monthly) to the individuals, the income being returned under Q.13 of their individual Tax Return.
At least the individuals concerned retain the right to continue to use the franchise should the company fail.
Also, if the individuals wished to sell the goodwill at a later date it still will qualify as a business asset I believe and attract full taper relief (which is not applicable now after only one year).
This may not fit in with their business plans or even not be possible under the franchise agreement which they have.
It is however one way of getting more out of the company on a monthly basis N.I.-free.

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