Franchising 101: The Ultimate Franchise Tax Checklist

Franchising can take away some of the stresses that come with starting your own business. But it doesn’t mean that you’ve escaped from those associated with sorting out your taxes. To make life simpler, we’ve created the ultimate franchise tax checklist.

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It's easy to forget, especially when you're starting your own franchise for the first time, there are many costs that go into running a successful business. Taxes happen to be just one of those – and there are a lot of different taxes you need to keep in mind to ensure your franchise is compliant with UK regulations. In this article we provide a rundown of the franchise taxes you need to pay and where you can find lots of helpful information to avoid making any errors. But before we get started, it’s important to consider what business structure your franchise has….

What legal structure does my franchise have?

There are several franchise business structures under which franchises can operate, the most common of which are ‘sole trader’ and ‘limited company’. Depending on the business’s status, its tax requirements will be different.

A sole trader is officially classed as self-employed and is the only owner of their business. They can keep the business’s profits after taxes have been paid, but if the business accumulates debts, their personal assets, such as their house, can be taken away.

Limited companies, on the other hand, have their own legal identity, separate from their founders – who become directors and shareholders. Unlike sole traders, those involved in a limited company can only lose the assets that have become part of the business. However, limited companies must pay corporation tax.

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>> Read more:

• Franchising 101: 6 Reasons Why You Should Hire a Franchise Lawyer
• Top 7 Franchise Law Issues to Know
• Franchisee fees - How are they set?

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What franchise taxes do I need to pay?

As a franchisee there are a variety of taxes you will need to pay, as franchised businesses are not exempt from any of the usual taxes independent businesses contribute. Even though the franchise model is different and you are paying the franchisor to operate under their brand name and business model, you are still viewed like any other business by the HMRC when it comes to your taxes.

1. Income Tax

All business owners must pay income tax, which is tax on any profits made. Just as employees pay tax on their salary, business owners must pay tax on their business’s profits. However, you only pay income tax on profits over £12,500, so if you earn less than this, you do not pay any tax. If you made £20,000, for example, you would only pay tax on £7,500 of your earnings. The percentage of tax you pay is dictated by the tax bracket you belong to. The brackets are dependent on income, so the more you earn or make, the more tax you have to pay.

If you run your franchise alongside a regular job, you may have to pay income tax on your salary sooner than you would if your income came from your regular job alone.

2. National Insurance

Although National Insurance (NI) is not technically a tax, it’s often treated like one because it is paid to the government. If you are employed within a business, your National Insurance contributions will be deducted from your wages by the employer and sent to HMRC. However, business owners must file a self-assessment form in order to pay National Insurance. It is vital that you pay your contributions correctly, but this can be confusing, as there are several different classes:

• Class 1: This applies to employees below the state pension age who earn more than £183 a week.
• Class 2: This applies to self-employed workers or business owners who earn more than £6,475 a year.
• Class 3: This is a voluntary tax donation. If you are exempt from paying Class 1 or 2 contributions, you can make a voluntary donation to make sure that there are no gaps in your National Insurance record, as this can affect your state pension.
• Class 4: This applies to self-employed workers or business owners who earn more than £9,500 a year. Unlike Class 2 contributions, which is a fixed payment, Class 4 contributions are linked to your income; the more you make, the more National Insurance you have to pay.

3. Corporation Tax

As previously stated, this type of tax is paid by limited companies. A business’s corporation tax is calculated as 19 percent of its profits. However, unlike with income tax, corporation tax does not have a personal allowance, so businesses must pay it as soon as they start to make a profit.

4. VAT

Businesses can register for Value Added Tax at any point, but it becomes a legal requirement once the turnover reaches £85,000. This means the business can charge tax on a range of specified products. Standard-rate VAT is charged at 20 percent, but a reduced rate is applied to other products, such as children’s car seats and home energy. On the other hand, products that are considered ‘essentials’ are tax-free. These products include most food items and children’s clothes.

5. Business Rates

This is a tax on business premises; therefore, if your company has its own premises, you will be required to pay business rates. This applies to buildings such as offices, shops, pubs and warehouses. The location and size of your business premises will affect the amount you have to pay. There are various business tax relief schemes and grants designed to help with business rates. Some buildings aren’t included in the business rates tax. Farm buildings, for example, do not incur the tax, and if you work from home you probably won’t have to pay it either, as you will already have paid council tax on the building. However, there are some situations in which you would have to pay business rates tax from your home-based business. If you welcome customers into your home, adapt your home for your business or employ staff who also work from home, it is likely you will have to pay business rates.

Please note: All rates and thresholds provided apply to the tax year 2020/2021.

How can I get help with my franchise taxes?

While your franchisor will be able to give you basic knowledge about which taxes you might be required to pay, you should ensure that you seek out an accountant before you launch your business. They will be able to tell you the amount of tax you need to pay and when you need to pay it. This will decrease the likelihood of incurring heavy penalties from HMRC.

The HMRC website is also packed full of information that you can read if you have any questions. You can also contact HMRC by phone and web chat if you’d rather talk your concerns through with an advisor.

Citizens Advice is also fantastic at helping people with confusing tax matters. It has links to lots of helpful websites, including GOV.UK, TaxAid, Tax Help for Older People and the Low Incomes Tax Reform Group. If you can’t find what you need on these websites you can call its national phone line or pop into your nearest bureau.

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>> Read more:

• 5 Qualities of a Successful Franchisor
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• How to Launch a Franchise and Get Noticed
• 4 Elements of a Successful Franchise
• How to Start a New Business on a Shoe-String Budget
• The Ultimate Guide to Franchising Success

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Franchise taxes – get it right first time

When you invest in an established franchise you can benefit from a proven business model and tailored support from the franchisor, but you still have to pay the same taxes a standard business owner would. For first timers it can seem daunting and it might make you want to run a mile. But if you take a methodological approach, seek advice from a processional and use the wealth of brilliant information there is online, there’s no reason why your franchise taxes should cause you any problems.

See our go-to franchise tax guide for more information on whether your franchise fee includes tax, what a self-assessment tax return is, how much you can earn before paying tax and more.