Are franchise fees tax deductible?
Investing in a franchise is a great way to go into business without exposing yourself to the risks of running your own start-up. Franchises have a greater chance of success and also benefit from the reputation of an established company. This saves the investor some of the work of creating a customer base.
Of course, like any business opportunity, investing in a franchise comes with its fair share of drawbacks. Not least, it can make doing your taxes a real headache. Many franchise newcomers don’t know which aspects of franchise expenditure are tax deductible and which aren’t. Luckily, we’re here to help.
Initial fees vs ongoing fees
Most franchise payments fall into two categories: an initial franchise fee and an ongoing service fee. The initial payment secures the use of the company’s name and any slogans, logos, or other trademarked materials. It can also cover training. The size of this payment can vary hugely, but according to the British Franchise Association, it tends to be around £40,000.
After securing the franchise, an investor can expect to pay a regular service fee for the ongoing use of the franchise. This is usually based on sales rather than profits and is typically around 7-8%. It is important to recognise the difference between these two types of expenditure. This is because HMRC treats them differently for tax purposes.
According to the HMRC Capital vs Revenue Expenditure Toolkit, the initial franchise fee counts as capital expenditure and is therefore not tax deductible. This is regardless of whether you pay in one or several instalments. This is also the case for any legal fees relating to the initial payment.
Occasionally, a deduction can be made from the initial payment if it relates to the provision of services by the franchisor. But according to the toolkit, this is only allowable if you meet the following two conditions:
- “Specific services are actually provided by the franchisor in accordance with the franchise agreement.”
- “The agreement stipulates that these services are paid for by reference to the initial payment and not the annual fees.”
Fortunately, HMRC is more lenient when it comes to ongoing service fees. They see these as a revenue expense rather than capital expenditure. That means they are an allowable deduction.
Put simply, initial franchise fees are not deductible but ongoing service fees are. However, it’s worth checking the HMRC toolkit for more information.