A Franchise Owner's Guide To Taxes

If you are looking to start your own business but do not want to start from the scratch, then franchise is one of the best option. Choosing to buy a franchise not only removes a lot of stresses that come with starting a new business, but also gives you an already established brand name to start with. It also gives you the required support and first class training which is otherwise not possible with your new business and though franchise is not a legal structure in itself but as per UK’s law, it can operate within the established legal structures such as a sole trader or a business partnership or a limited company and the most preferred formats for franchise is sole trader and limited company.

Any franchise will involves a franchisor i.e. the owner of the business and a third party i.e. the franchisee, where the franchisor gives the license to the franchisor to operate a business or goods/services suing the former’s name and systems for a definite period of time against a fee which could either be an upfront payment or an ongoing payment fee or a combination of the two and the agreement means that the franchisor gives all the elements of his business to the franchisor for him to succeed including branding, products, designs, supplies, marketing and advertising support etc. In the United Kingdom, there are three main types of franchise i.e. business format franchise, product distribution franchise and manufacturing franchise.

Also Read: Franchise Opportunity

Choosing a Franchise Business

1. Choosing the right type of franchise.
2. Do your homework on franchise opportunities.
3. Plan and work out your finances because you would need to make initial capital investment and the franchise fees.
4. Highlights your strong points in your franchise application because the main qualities franchisors or investors are looking in a franchisee are energy, communication skills, dedication, creativity and not to mention confidence.
5. Read and understand the terms of the franchise agreement.

Type of Franchise business

Once you have made up your mind and your application has been accepted, you are all set to start with your franchise. However what you need to remember here is that owning a franchise doesn’t saves you from taxes and as the famous saying goes – the only certainties in life are death and taxed and thus you are liable to pay all taxes which any other businesses are paying such as corporation tax, any taxes related to the franchise operation, personal taxes etc, which however is determined by the legal structure your franchise falls in, such as:

• Sole trader: If you are starting your franchise as an individual, you are liable to pay Income Tax and National Insurance contributions in your annual self-assessment return, which you need to submit by 31st January every year.
• Limited company: As a limited company, you need to pay the corporation tax on your profits and if you are withdrawing monthly salary from your business, then it is important and mandatory to deduct Income Tax and submit Employer’s National Insurance Contributions.
• However, irrespective of the legal structure you have started with, you need to register your franchise if annual profits exceed £85,000.

Taxes: A Franchise Business Owner Should be Aware About

When you are investing in any franchise, you are basically paying for the rights in order to operate it for a definite time period and as a franchise owner, you must be aware of the main taxes such as:

• Income tax: Irrespective of the business or legal structure you choose for your franchise, you need to pay income tax annually on the income coming from your franchise i.e. whether you are a sole trader or director of a limited company; you have to file self-assessment return annually. However, you start to pay any income tax on the profit generated from your franchise once it goes over your personal allowance i.e. £11,500. Things could be a bit different if you are running your franchise business as part time and in this case, you may start to pay income tax on your salary sooner.
• National insurance: As per the UK law, all franchises are subject to the same National Insurance contributions as an independent business owner and as a self-employed person, you are liable to pay two types of National Insurance:
  • Class 2: Class 2 National Contributions is a flat weekly fee; applicable to all the sole traders irrespective of the size or the turnover of the business and if the profit from your franchise is less than the annual threshold of £6,025 you have an option to opt for class 2 exemptions for your franchise. However, in order to ensure that your pension is not affected, you can make voluntary Class 2 contributions.
  • Class 4: Class 4 National Contributions is directly linked to the annual profit of your franchise and is calculated based on the details you have entered in your self-assessment tax form. If the annual profit of your franchise is above £8,164 then you are liable to pay a certain percentage of your annual profit as Class 4 National Contributions.
• Corporation tax: You pay corporation tax only if your franchise is operating under the limited liability legal structure. Operating your franchise as limited company implies that you start paying the corporation tax as soon your franchise business starts making profit. As per the current taxation system in the United Kingdom, corporation tax is at the rate of 19% and must be paid nine months and one day after your accounting year end. If your franchise is operating as a limited company, then you need to notify the Her Majesty’s Revenue and Customs (HMRC) well in advance regarding the same and failing to so might attract financial penalties.
• VAT: As mentioned above, any franchise having its annual income more than £81,000, have to register itself for VAT and like corporation tax, you need to notify the HMRC regarding the same well in time in order to avoid any late fee penalties.

Also Read: Low Cost Franchise Opportunities in UK

How Franchise Owner Should Deal With Taxes

Taxes are a fact of life for any and all franchise owners and need to be planned well and before time and to start with, you can have a discussion with your franchisor to understand about the taxes your business needs to pay. The main reason why you need to approach your franchisor as a first step is simply because he is been there in the same segment business much before than you have entered and thus must be more knowledgeable about the industry and the applicable taxes. Apart from talking to your franchisor, you must take below mentioned steps:

• Hire an accountant: Accepting the very fact you cannot know and deal with all can help you saving your hard earned money and in order to manage your accounts and taxes efficiently, hiring an accountant is no less than a thumb role. Also, the taxation policy views the accountant fees as deductible expense, so you are not losing anything and rather gaining everything.
• Detailed records: Keeping detailed records of your income and expenses is an unsaid rule which every franchisee must and does abide by. Doing so not only keep you well informed about your incomes and expenses but also ensures that you don’t end up overpaying on taxes. Having high-quality records is sign of good franchises.
• Plan in advance: It is advisable to have prior knowledge of estimated taxes from your accountant because if you have a rough idea of how much you have to pay on taxes, you can put that much money aside and thus can save on your tax bills. Even the most successful franchises get concerned over taxes and it is quite normal to be concerned especially if you are dealing with it for the very first time. However, with a little bit of planning you can pay taxes well on time.

In a nutshell, franchising is quite an appealing and lucrative business structure; and offers numerous advantages to a franchisor. One of the most attractive aspects of franchise is low risk factor mainly because the business has already been established and it is not a new one.

Also, you don’t need to work on the branding of your business because people or your target audience is already aware of what your business or franchise is all about and in case your franchisor is known nationwide, then his reach can do wonders for your own franchise because it may run national advertising campaigns on various platforms such as television, social media etc and all you have to do is to plug into its advertising campaign.

However, like any other thing out there in the world, owning a franchise has its own share of demerits. One of the main downside of franchising is that the franchisor may dictate how the franchise should be operated and if that’s the case then the entire idea of having your own business and not working under someone goes down the drain.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.