Claiming VAT on a Franchise

awwallace22

Hope someone can help!

A sole trader bought a franchise plus VAT. The sole trader voluntarily registered for VAT. Three months later the sole trader deregistered for VAT - (sales not what he expected). HMRC sent a request for the one and only VAT return (Final) to be submitted. This covers one quarter. I know that VAT can be claimed on a Franchise (treated as a supply of service not an asset) providing the VAT incurred on the service is no more than six months prior to VAT registration date. But can it be reclaimed if the sole trader registered and deregisted all within the same quarter?

Any input greatfully received

sdv

From the date of starting the business to the date of de-registration

Account for the vat on sales to HMRC and
Claim vat on invoices received from suppliers, including the franchise setup costs

I believe that this can be re-claimed in the one and only vat return. I have not come across regulations that says otherwise.

Monsoon

The VAT arose in the period in which he was registered therefore can be claimed.

The only thing that could change it is if intangible assets are included in the asset value on deregistration (don't know, would have to look it up, have a feeling they aren't) and if the fee is an intangible asset (don't know).

Slight tangent, feel sorry for the chap, franchises are rarely a good plan.

awwallace22

Ahh thanks for the input. I had a sneaky suspicion that he probably could claim, just needed to be sure! I dont favour franchises either...too much hard work involved before you see anything in your pocket!!!

Thanks again

Bloater

Sorry to throw some doubt on the situation...

Franchise arrangements usually consist of two elements:

1) The initial purchase of the Francise
2) Ongoing management fee.

Whilst I agree that the VAT on any ongoing management fee during the quarter is reclaimable, I beleive that the initial purchase element would be considered an intangible asset. This would still be in the ownership of the business at the end of the period so output VAT would also have to be accounted for, thus cancelling out the input VAT from the purchase.

The only exception to this would be if the asset was so worthless at the end of the period that it could be written off under an impairment review. Without knowledge of the franchise agreement, ie resale possibilities, I couldn't confirm this.

I agree with the fact that franchises are generally poor value, with a large initial outlay and crippling ongoing fees etc...

Cheers

JodieR

Bloater wrote: »

I beleive that the initial purchase element would be considered an intangible asset. This would still be in the ownership of the business at the end of the period so output VAT would also have to be accounted for, thus cancelling out the input VAT from the purchase.

Cheers

I agree with this comment, but just wanted to add that there's no indication of the amounts involved in the initial post, but I think that if the VAT amount of all the assets held at the date of de-registration is under £1000 then you don't need to make this adjustment, and therefore could reclaim the whole amount on the VAT return.

awwallace22

Ooh Im getting a little hesitant regarding the final VAT return

When reading the notes on HMRC I thought that the VAT must be accounted for on tangible assets on hand (intangible assets are excluded) where the VAT due would exceed £1,000.

The franchise invoice value was £12000 plus VAT £2100. The invoice was for vehicle writing, work wear, tools, promotional material, operation manual and a small amount of stock, a course incl hotel etc, but this was not broken down individually in value. The soler trader purchased the van seperatley and the VAT element for this was £600.00

Monsoon

awwallace22 wrote: »

Ooh Im getting a little hesitant regarding the final VAT return

When reading the notes on HMRC I thought that the VAT must be accounted for on tangible assets on hand (intangible assets are excluded) where the VAT due would exceed £1,000.

The franchise invoice value was £12000 plus VAT £2100. The invoice was for vehicle writing, work wear, tools, promotional material, operation manual and a small amount of stock, a course incl hotel etc, but this was not broken down individually in value. The soler trader purchased the van seperatley and the VAT element for this was £600.00

If the notes say tangible assets on hand only, then that's good news. Work out the current market value of all the tangible assets. It doesn't matter that the original invoice didn't break it down - you are looking for a current market value i.e. what you'd get for it, today, cash, everything must go, in a fire sale (you get my drift, not the price you could get if you held out for the best price).

Of what you've listed, work out the fire sale price on these (I assume they are all to be kept and not returned to the franchise):

Van
Tools (capital items only, not revenue, i.e. those individually worth £300 each or more)
Stock

If the total VAT on these is under £1000, then you're fine. If it's not, it needs declaring on the final VAT return, and the total VAT on the original invoice can be claimed as input VAT.

The other items aren't stock or assets so ignore them.