If a client has paid a franchisor a franchise fee, and then gets paid a commission on sales made, is the Franchise cost a capital cost? which can be amortised across the number of years of the franchise agreement? The Franchise is not a limited company.
A potential client says HMRC said she couldn't take it as a business expense (maybe that's where they miss interrupted her question) ??
I just reading on HMRC, It looks like the initial frachise fee isn't tax deductible, but is for accounting purposes? (one of differences between taxable profits and profit and loss profits... does that sounds right to anyone?
An initial franchise fee (as opposed to the recurring annual one's) is an intangible asset of the business.
You need to be careful as the fee may include tangible assets such as a computer and consumables to be expensed such as stationary and possible seperate intangibles with different expected lives such as client databases.
The actual intangible asset part would be amortised over the life of the franchise.
Unlike depreciation, amortisation is allowable for tax purposes.... but only through corporation tax for companies so, the question has to be whether your client should consider incorporation (although if they've already made the purchase then thats already too late).
The immediate question is what did the franchise fee actually buy and can it be broken down into the Intangible(s), any tangible assets and consumables?
The bigger question needs an accountant on board to help the client make the right choices over their legal form in order to optimise their tax planing (if not already too late).
For info, I think that the tax system is wrong over the treatment of the self employed over this but that doesn't help your client.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
