Tax Deductions for Franchise Fees

Newsletter issue - December 2009.

One of the easiest ways to step into the world of business is to acquire the right to operate a franchise. To do this the franchisor, (the person providing the franchise), and the franchisee (the person who is to run the franchised business), will sign a franchise agreement.

A typical franchise agreement will cover various matters each with different tax effects such as:

• the right to operate the franchise for a period, often at specified premises or within a defined geographical area;
• initial services, such as advice on site selection and staff recruitment, training and assistance with the management of the unit;
• ongoing services including marketing, advertising, updating of the franchise and provision of stock and plant.

The grant of the right to operate the franchise and the provision of initial services will normally be covered by a lump sum payment from the franchisee. Ongoing services will be charged for by means of a periodic fee, paid monthly or weekly. Stock and plant items will usually be charged for as required by the franchisee.

The Taxman views the right to operate the franchise as an intangible capital asset. Where the franchisee is a company it can claim the cost of this intangible asset in its accounts, spread over an appropriate period. However, a franchise business operated as a sole trader or partnership will NOT generally get a tax deduction for the cost of an intangible asset. However, where the intangible asset includes know-how relating to industrial processes, mining, agricultural or forestry, the payment can qualify for capital allowances. Both incorporated and unincorporated businesses can claim capital allowances covering the cost of industrial know-how.

Amounts paid for on-going services will be treated as operating costs of the franchise business, and will be tax allowable in all cases. Items of plant will normally qualify for capital allowances, which will give a 100% allowance for the first £50,000 of plant purchased each year.

The tax treatment of the sums payable by the franchisee and received by the franchisor will not necessarily mirror each other. Similar items may also attract different tax treatment under different franchise agreements, it largely depends on the individual circumstances of the deal. In all cases the amounts paid need to be allocated against the different goods, services, and rights provided for under the franchise agreement to determine the correct tax treatment.

If you are looking at a franchise we can advise you on the tax consequences of the deal you are looking at and perhaps how to restructure matters to your maximum advantage.