Taxation of a franchise

Taxation of a franchise

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I am trying to understand how a franchise is tax

The cost of a franchise includes:

 
  • A licence fee
  • Training
  • Equipment
  • And initial stock of materials
Assuming the franchise is brought by a sole trader, and then sold to a limited company for the same amount before trading starts.
 
Can the cost of the franchise be offset against profit for cooperation tax?
 
Is there any liability to personal income tax doing the above?
 
What are the issues to consider with taxation?
 
Is there any benefit in operating as a sole trader? (Other than lower accounting changes)
 
How can I find an accountant that can give more detailed advice on the above? (E.g. what sort of accountant is needed?)

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By User deleted
10th May 2010 21:28

Seek advice

Some elements of the fee shoud be tax allowable, but make sure you have a detailed break down from the franchisor - see the other current any answers Q on this topic which has two or three good answers.

WRT to finding an accountant, interiew two or three different ones locally, or over the 'net by phone, and see what answers you get, how helpful they are, etc.  Ask them about the sole trader v limited thing as well.

Lisa

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By DMGbus
10th May 2010 22:39

Tax credits; Training costs; Franchises = caveat emptor

My recommendation to any new business owner is to immediately register for Working Tax Credits.

The 'phone no. for this is 0845 300 3900.

If the business has high capital allowances-eligible expenditure in year one, then there can be a big WTC tax advantage by having a financial year of 30 April rather than  the conventional boring [but easy] (lack of fore  thought) 5 April or 31 March.

Any accountant who you interview should be able to explain why the above advice is good advice.

Some accountants as a matter of policy do not advise on tax credits, choosing such an advisor could cost you dearly. 

Regarding the cost of training you will get no tax relief as a sole trader or partner unless such training is for an employee.  If you traded through a Ltd Co the training would be provided to you as an employee (director) and therefore tax  allowable.  However, by trading through a Ltd Co the Working Tax Credits that I've referred to earlier might not be as generous in terms of amount awarded.

There are more issues to a Ltd Co than just Tax Credits and tax relief on training - if you choose this format check if the extra accountants fees for producing 12 pages of boring annual technical accounting garbage exceeds the tax relief gained on the training costs. 

Finally my turn to be boring, but maybe the best bit of advice, might be to NOT start your business as a franchise - I've seen far too many rip-offs and financial losses incurred by people trading through a franchise.  "They make the profit, you take the risk" where "they" is head office.  Please, thoroughly review the promises of riches that head office of the franchise make.  Check out other people carrying out the same brand franchise, if they're trading as Ltd Co's then the true figures can be looked up from public record and compared to the head office sales patter.   

Some bad franchises / similar arrangements of financial slavery that I've seen in the past 30 years or so have included:-

Tenanted operator of a public houseWill writingVehicle cleaning (pressure vehicle cleaning or similar)Wheely bin cleaningDating agency (search for a mate or similar)Fast food

Whilst the vast majority of franchises that I've seen figures for have been bad news, I did seen one that was financially successful - a printing / stationery shop (but it was not an easy task  / pronto  to find a buyer at retirement to recoup the massive capital investment).  

 

 

 

 

 

 

 

 

 

 

 

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By User deleted
10th May 2010 22:52

Am I right to assume that Tax Credits is based on joint income?

And that you can’t get Tax Credits if your joint income is more than the bread line if you don’t have children?

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By DMGbus
10th May 2010 23:02

Joint income counts for Tax Credits

For a loss-making business that loss is deducted from the other family bread-winners income for Tax Credits purposes.

With the current 100% Annual Investment Allowance such losses can easily arise in the first year or so of a businessn when things like vans, lorries, computer equipment, etc are bought.

To assess this issue take along to the accountants who you interview details of your partners income together with your projected results (including capital expenditure projection) for the first year of so of the business.

If indeed the first year produces a loss for tax purposes please be aware that the tax relief is very different in the early years for a sole trader / partnership as compared to a Ltd Co.  Ask the accountants who you interview about this difference in tax relief - you have more options and the potential for a tax repayment of tax paid personally in recent yearas a sole trader or partner, but not as a Ltd Co format.

 

 

 

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