Franchising can be a fuss-free, fast and reliable way of starting a business in a particular industry. You are buying in to a franchisor’s knowledge, systems, processes, brand and support, and this can speed up your growth and increase the chances of your business succeeding.
All that support is paid for by franchise fees. Franchise fees can be split into two main groups:
- Initial franchise fees or Joining Fees
- Monthly franchise fees, often as a percentage of your revenue.
The initial franchise fee generally will cover the costs to the franchisor of helping you get up and running. In home care, this will include a start-up pack of stationery, marketing materials, website development, signage, training, recruitment support, and more.
If you are buying a restaurant franchise for example, you may need to be careful about capital expenses included in these fees. HMRC has guidance on their website about this. But because in home care you don’t need big expensive items such as ovens, freezers, fitting out shops etc, this isn’t a problem in our sector.
Are franchise fees tax deductible?
Yes, you can deduct monthly franchise fees from your corporation tax bill. Because monthly franchise fees are a legitimate business expense, they will be recorded as an overhead when it comes to your end-of-year accounts.
This means that you can claim these costs against your profits, reducing your corporation tax bill. For example, if you had a turnover of £200,000, and a 5% franchise fee, you would pay £10k on franchise fees, covering your use of the brand, the website, systems, processes and support. This £10k cost would reduce your corporation tax bill by £1.9k if the corporation tax rate stays at 19%.
It is essential for franchisees to maintain accurate records and documentation of all payments made to the franchisor. Proper reporting ensures that the deductions for ongoing franchise fees are accepted by HM Revenue and Customs (HMRC).
However, in general the initial franchise fees you pay are considered capital expenditure because they are incurred to acquire the right to operate the franchise. Capital expenditures are not immediately deductible for tax purposes. Instead, they are treated as an asset and may be eligible for capital allowances.
Other deductible expenses
In addition to franchise fees, franchisees in the UK can also deduct other related expenses from their taxable income. These may include:
Marketing and advertising costs
Expenses incurred for local marketing and advertising efforts, often mandated by the franchisor, can be deducted as business expenses.
Training costs
If additional training is required after the initial setup, these costs are usually deductible as business expensesOperational costs
Day-to-day operational costs, such as rent, utilities, salaries and supplies, are generally deductible.
Franchisees should engage in effective tax planning to maximise their allowable deductions and minimise their tax liabilities. Consulting with a tax professional or accountant who has experience with franchise businesses can be invaluable. They can provide tailored advice based on the specific franchise agreement and the franchisee’s financial situation.
Can I claim back VAT from Franchise Fees?
For most businesses, any VAT you pay on your franchise fees you’d be able to reclaim from the VAT you charge your customers or clients. A home care franchise is a little different, because it is VAT exempt. This means that although the franchisor has to charge VAT, home care companies aren’t allowed to reclaim VAT from clients. There is a campaign at the moment to change the rule to make home care zero rated rather than exempt, so watch this space!
If you would like more advice on how to start a non-medical home health care business then simply click on the highlighted wording to reach our blog on the subject.