Tax Implications When Buying a Franchise
Investing in a franchise is a good way of growing your business and although you will suffer a short term loss, the prospects of long-term gains are far stronger. But what are the tax implications of investing in franchises now and in the future and how can you ensure you will not leave your business vulnerable?
Surprisingly, HMRC does not have any special rules for tax deductions in relation to franchises. Although you are likely to accrue profits in the long-term which will have to be declared in your self assessment tax return, the initial outlay may leave you financially vulnerable – therefore you don´t want to be paying unnecessary tax as well!
Understanding tax liabilities in relation to franchise arrangements can be complicated, but providing you knowing exactly what you are paying for, the tax rules are the same as the day to day running of you business. Therefore you are entitled to tax breaks if your franchise investment package includes stocks and shares or the hiring of equipment and premises.
Potential problems can arise in relation to tax liabilities if the franchise you invest in does not break down what is tax deductible and what is not – therefore you will have decide this for yourself and declare it in your Self Assessment Tax Return Form. And herein lies the greatest danger, because even if you apply your best judgement to deduct the appropriate tax, if HMRC consider you have made a mistake they can fine you a minimum of £100. Ignorance of the rules is not a defence you can argue to avoid payment. The rules are harsh and strictly applied.
Tax deductions for lump sum franchise payments
Particular care should be taking when you are attributing lump sum payments as the tax man accounts this as part of Capital Gains Tax. If HMRC do that you may have to wait until you sell your franchise before you can claim anything back and the tax relief is likely to be less than if it is categorised as a trading profit.
To avoid losses therefore, consider the tax implications of a franchise before you buy into it. Goodwill rights for example, are not tax deductible and if you are left with expenses from your trade income that have expired or cannot sell you will not get any tax relief. If in doubt speak with a qualified chartered accountant who will be able to advice you accordingly.
What other tax liabilities might I have?
Other tax implications you should consider is if you change your business to a limited company before entering into a franchise agreement. The reason for this is because limited companies are given tax breaks for the cost of intangible assets such as rental equipment and staff training whereas sole traders and partnerships do not.
If you are thinking of entering into a franchise agreement and would like some advice about potential tax liabilities and deductions contact Taxaccolega on our free phone number 0800-0235-234 or email us at firstname.lastname@example.org and speak to a member of our friendly and knowledgeable team.