In a franchise, the franchisor (the organisation selling the product or service) gives the franchisee (the person buying into the business) the right to use a tried-and-tested, usually branded, system for running a business. The package normally includes training, centralised marketing and other support services.
Most franchise agreements involve an initial fee when you join, followed by ongoing fees while you trade. The two are treated very differently for tax.
Initial fee
The initial fee usually pays for the right to use the franchisor’s brand and system, together with the start-up items you need to begin trading. For a Slimming World Consultant this is a single payment which covers the licence to run a group, your initial training, and a package of physical items such as books, stock and equipment.
The fee is therefore a mix of tangible (physical) and intangible (non-physical) items. Start-up books and stock are tangible: you can hold them, and if you later sell them on, the sale is income for your business. The licence to use the Slimming World name and your initial training are intangible. Equipment is not claimable as it is never owned by yourself.
Only the tangible items can be claimed as a business expense. The licence and training elements cannot be claimed, for the reasons explained below.
Why can’t the licence and training be claimed?
HMRC treats the initial fee paid by a franchisee as capital expenditure, so it is not an allowable trading expense. Most Consultants prepare their accounts on the cash basis, where capital costs are normally deductible when paid, but there are two specific exclusions that apply here:
- Training: no deduction is allowed under the cash basis for capital expenditure on education or training. Initial franchise training is also treated as training to enter a new trade, rather than to update existing skills, so it would not be allowable on the traditional basis either.
- The licence: a franchise right is an intangible asset. Under the cash basis an intangible asset can only be deducted if it has a fixed maximum duration ending within 20 years. The Slimming World franchise agreement has no end date, so the licence element does not qualify and cannot be claimed under either basis.
Ongoing training provided by Slimming World is free of charge, so there is nothing further to claim for training.
What you can claim
You should receive an itemised list of what is included in your franchise package, with a value against each item. The value of the tangible items on that list can be claimed as a start-up cost in your first year.
Annotated franchise list
To help with this, we’ve prepared an annotated franchise list showing the items provided in a standard Slimming World franchise and which of them are claimable. You’ll find it at the bottom of this article under ‘Attachments’.
Ongoing fees
Franchise fees paid while you are trading (sometimes known as Net Fees A) are an ordinary business expense and can be claimed in full. When using Pulse, the system will automatically process this for you as explained on the Weekly Franchise Account Upload article.
Subsequent franchise fees
Any later fee paid to continue operating under the franchise is claimable as an expense, in the same way as a business licence.
References and further reading..
- HMRC treats the initial fee paid by a franchisee as capital expenditure, so it is not an allowable trading expense (HMRC BIM57620).
- Under the cash basis the general bar on capital expenditure is relaxed and most capital costs are deductible when paid (HMRC BIM70035), subject to the specific exclusions in ITTOIA 2005 s33A: no deduction is allowed for capital expenditure on education or training (s33A(3)) or on a “non-qualifying intangible asset” (s33A(4)(e)).
- A franchise licence is an intangible asset, as “intellectual property” expressly includes any licence or other right in respect of a brand or know-how (s33A(14)), and an intangible asset is non-qualifying unless, by virtue of having a fixed maximum duration, it must cease to exist within 20 years (s33A(9); HMRC BIM70037).
- Initial training is separately non-deductible because it is training to enter a new trade rather than to update existing skills (HMRC BIM35660). For general background see Nelsons Solicitors: Franchise fees and tax, noting that its comments on relief over the franchise term relate to limited companies and do not apply to self-employed Consultants.
This information, as with all articles in our knowledgebase are based on details provided by HMRC at the time of publishing, and you should speak with your accountant if you have any queries.