Allowability of Initial Franchise Fees
Carl Reader, Dennis & Turnbull Ltd
As you may be aware, the initial franchise fees that you incur when purchasing a licence to operate a franchise are subject to complex taxation laws which affect the timing of any tax relief on these expenses. It is essential that you take professional advice in relation to any upfront franchise fees as this is often an area where franchisees make costly mistakes.
Broadly speaking, the treatment of the initial payments are as follows:
- The initial “franchise fee” should be treated as capital expenditure, together with any legal costs associated with the agreement. This is the case regardless of whether payment is made in one lump sum or by instalments.
- Any “initial training” provided by the franchisor should also be treated as capital expenditure.
- Any “secondary training” should be deducted as a trading expense from the first year’s accounts.
- The costs of any fixed assets that are purchased from the franchisor should be treated in line with the standard capital allowance rules and may qualify for the annual investment allowance of up to 100% of the cost.
- Payment for items such as stationery, initial marketing and other such miscellaneous costs should be dealt with as a revenue expense.
As you see above there are various ways that this initial payment can be treated and this is further complicated if you are purchasing an existing franchise, as there then needs to be an apportionment between the sale of goodwill, the sale of the assets and the typical franchise expenditure as noted above. There would also be a need to be cautious in respect of the elements of the “initial cost” which attract VAT.
The above information is provided as general advice and no liability is accepted by the author, Dennis & Turnbull, or Select your Franchise in respect of individuals acting on the above. Independent advice should be sought in all circumstances.
Tags: carl reader, franchise fee, franchising, taxation
