Franchise outlay

jackie515

Can anyone let me know how you treat the cost of franchise agreement purchase in the accounts of a sole trader and are there any benefits in being a Ltd company.

There is commissions to be paid against sales regarding the franchise and the franchise agreement is for 5 years.

peugeot

The franchise agreement meets the definition of an asset because it will generate revenue, therefore I would capitalise it and write off the cost over its life of 15 years.

Ltd co's have various benefits/down-sides. If sole trader is planning to operate as a Ltd Co for tax purposes, I would undertake a tax planning exercise first to see if there are any tax savings (these are not as prevalent as they were a couple of years ago).

Commissions due on sales should be treated as cost of sales as and when they arise.

Best regards
steve

Bluewednesday

I would also add that the amortisation is allowable for tax purposes on franchises. You would not claim capital allowances on it.

Have you made a typo Steve, would you write it off over 5 years?

peugeot

Oops!!!:001_wub:

I mustn't have woken up yet - it is indeed 5 years not 15!!!

Thanks Annette!!

jackie515

This might seem like a silly question , but how do you claim the amortisation on the SA return for the client?

peugeot

You don't, it just gets included in the P&L as an expense (same as depreciation) but you don't add it back when computig the D1 profits.

Regards
steve.

jackie515

That explains it, I couldn't find out when they would get the relief. Thanks for your help.

Bluewednesday

I suddenly remembered that when I dealt with this there were some other rules that needed to be taken into account before we could decide whether the amortisation was allowable.

I suggest you check your actual situation here:
Franchise manual before you carry on to ensure you treat it correctly.

Good luck

jackie515

Thanks Bluewednesday.

I have requested a copy of the franchise agreement and they have only just started trading so it will be a while until the accounts are completed.

I originally telephone CCH to find out how to treat the franchise payment and they told me that sole traders do not get any relief but companies do! I didn't think this was correct which is why I posted the question on the forum as is didn't seem right that a sole trader would not get any relief at all.

Bluewednesday

That might actually be right, it's sounding a bit familiar, the client I had was a limited company so that's how we could claim tax relief.

I would go through this manual carefully

peugeot

CCH are right - amortisation is not allowed for sole traders - only companies. I too was actually asked this question a few weeks ago!!

Kind regards
Steve