Top tax tips for franchisees & franchisors

Expert advice from Richard McDermott, tax manager at d&t

Tax is a complex issue, partly because from time to time the rules change.

Annual investment allowance
This year, there have been some important updates to the annual investment allowance that could be particularly relevant for franchisees starting out. From the beginning of this year the AIA rose to £1 million. This means for franchisees buying items such as equipment or fitting out a retail store, coffee shop or gym, on expenditure up to £1million a 100 per cent deduction against their profits can be claimed.

This is great news for new businesses starting out, as otherwise they would only be able to claim an 18 per cent deduction in the first year, then 18 per cent of the remaining balance in the second year and so on, reducing year on year. 

This level of AIA is a temporary increase until 2021, after which it has been proposed to reduce it back down to £200,000, but in the past it has been as low as £25,000. With such an attractive AIA, now is a good time to take advantage of this important change.

The good news for franchises using vans is that they qualify for AIA as well. Although different rules apply for cars, those with very low emissions (C02 emissions of below 50g/km) qualify for first year allowances, meaning that a 100 per cent deduction is available in a similar manner to AIAs. 

‘Medium’ emission cars with CO2 emission of 51g-110g only qualify for 18 per cent capital allowances, while for ‘high’ emission cars over 110g the rate is just six per cent.

Capital gains tax
When it comes to capital gains tax, there are no major new changes. However, a question frequently asked by franchisees we work with is about the CGT relating to the purchase price of their franchise - or initial lack of it. 

When a franchisee buys a franchise, no tax relief is usually available on the purchase cost, as it is only deducted from the sale proceeds on disposal. When the franchisee comes to sell the franchise, they can then claim the annual CGT allowance (currently £12,000) on the gain.  Any gain above this level would then be subject to CGT at 10 per cent, provided it qualifies for ‘Entrepreneurs’ Relief’, as would typically be the case.

In other words, if a franchisee bought a franchise for £100,000, no tax relief would be available until the business was sold. If they sold it for, say, £200,000, the chargeable gain would be £88,000 (£200,000 - £100,000 - £12,000) resulting in a CGT liability of £8,800 (assuming Entrepreneurs’ Relief applies).

Research and development
One area HMRC is actively promoting currently and which could be of interest to certain franchisors is tax relief available for any limited companies undertaking qualifying research and development work. 

There are specific qualifying criteria, but any franchisor looking at developing new and innovative products or improving ways of doing things, which may for example relate to special website development, should take note.
 
Any advance in a field of science or technology that extends the overall knowledge in the field and not just the company’s own state of knowledge or capability could qualify. The new technology should not be readily resolved by a ‘competent professional’ in the industry and it will be necessary to show how the scientific or technological uncertainties were faced and how these were overcome.

If the criteria are met, the R&D qualifies for an additional 130 per cent of qualifying costs to be claimed for tax purposes. So for a company qualifying for £100,000 worth of R&D, there are additional qualifying costs of £130,000 taking the total to £230,000. This can reduce the corporation tax liability by £130,000 x 19 per cent = £24,700. 

Alternatively, if the company records a loss, a repayable R&D tax credit of 14.5 per cent can be claimed, resulting in a welcome cash boost to the business.

I have just done an R&D claim for a client that should result in a corporation tax repayment of £63,000. This is, therefore, a hugely valuable tax break for limited companies undertaking R&D work.