Welcome to December’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
If you need further assistance just let us know or you can send us a question for our Question and Answer Corner.
We are committed to ensuring all our clients don’t pay a penny more in tax than is necessary.
Please contact us for advice in your own specific circumstances. We’re here to help!
Table Of Contents
Tax Deductions for Franchise Fees
A typical franchise agreement will cover various matters each with different tax effects such as:
– the right to operate the franchise for a period, often at specified premises or within a defined geographical area;
– initial services, such as advice on site selection and staff recruitment, training and assistance with the management of the unit;
– ongoing services including marketing, advertising, updating of the franchise and provision of stock and plant.
The grant of the right to operate the franchise and the provision of initial services will normally be covered by a lump sum payment from the franchisee. Ongoing services will be charged for by means of a periodic fee, paid monthly or weekly. Stock and plant items will usually be charged for as required by the franchisee.
The Taxman views the right to operate the franchise as an intangible capital asset. Where the franchisee is a company it can claim the cost of this intangible asset in its accounts, spread over an appropriate period. However, a franchise business operated as a sole trader or partnership will NOT generally get a tax deduction for the cost of an intangible asset. However, where the intangible asset includes know-how relating to industrial processes, mining, agricultural or forestry, the payment can qualify for capital allowances. Both incorporated and unincorporated businesses can claim capital allowances covering the cost of industrial know-how.
Amounts paid for on-going services will be treated as operating costs of the franchise business, and will be tax allowable in all cases. Items of plant will normally qualify for capital allowances, which will give a 100% allowance for the first £50,000 of plant purchased each year.
The tax treatment of the sums payable by the franchisee and received by the franchisor will not necessarily mirror each other. Similar items may also attract different tax treatment under different franchise agreements, it largely depends on the individual circumstances of the deal. In all cases the amounts paid need to be allocated against the different goods, services, and rights provided for under the franchise agreement to determine the correct tax treatment.
If you are looking at a franchise we can advise you on the tax consequences of the deal you are looking at and perhaps how you restructure matters to your maximum advantage.
Christmas Gift Time Mr Taxman!
– Gifts to customers of the products or services you normally sell are tax allowable, as long as you are not in the food business.
– Small promotional gifts of any item are also treated as tax allowable for your business if they cost less than £50 each and carry a clear advertisement for the business. However, you cannot get income tax or corporation tax relief for the cost of gifts of food, drink, tobacco and gift tokens of any value.
– A number of gifts worth more than £50 in total should not be made to the same person in any 12-month period.
– If you are VAT registered you can reclaim the VAT on small gifts that cost up to £50 each, including gifts comprising of tobacco and alcohol.
– If the gift cost more than £50 (net of VAT) you must account for the VAT on the item as if you had sold it at cost.
Gifts to your staff are tax allowable, but your employees could be taxed on the value of the gift as a benefit in kind. In that case you would also have to pay Class 1A NI on the value of those gifts. The Taxman does consider some small items to be trivial benefits, which can be given as tax-free gifts to staff members. Trivial items can include seasonal gifts such as a turkey, an ordinary bottle of plonk (not fine vintage or champagne), or a box of chocolates.
Where you are considering making larger gifts to each employee such as a Christmas hamper, you can include the cost of those gifts in a PAYE Settlement Agreement (PSA) with the tax office. The PSA allows you pay the tax and NI due on behalf of your employees.
Avoid the Higher VAT Rate
Where services or goods are invoiced for in advance, the VAT rate applies according to the date of the invoice. Say an organisation normally raises invoices for its annual membership fees on 2 January each year. If the 2010 membership invoices are raised on 1 December 2009 the members don’t have the VAT increase and the organisation would receive at least some of its membership income earlier.
The VAT rate to be applied to a sale normally depends on the tax point for that transaction. This tax point is usually when the customer receives the goods or services. However, that tax point is superseded by an earlier date if the money is received before the supply of goods or services, or by the invoice date if that invoice is raised within 14 days of the goods or services being supplied.
When the VAT rate changes in the middle of these dates, you can choose whether to apply VAT at the date when the goods were supplied, or the date the invoice is raised. If you supply goods on say 24 December 2009, but raise the invoice on 4 January 2010, you have the option of charging 17.5% VAT rate based on the invoice date of 4 January 2010, or 15% VAT based on the date the goods were physically supplied.
Where you are supplying a service over a period that straddles the VAT increase, the VAT man will, by concession, allow you to charge VAT at 15% for the portion of the work done before 1 January 2010 and 17.5% VAT for work done on or after that date. Alternatively you can apply the usual rules and charge VAT according to the date the invoice is raised, or the payment is received, which ever happens first.
There are tax-avoidance rules which will add an extra 2.5% supplementary VAT charge where the value of the sale (and connected sales) total more than £100,000, or the customer and supplier are connected, or the payment is due more than six months after the date of the invoice. Talk to us if your sales are likely to fall into any of these categories.
Tax Relief on Accountant Fees!
Where an individual runs his own business as a sole-trader, his personal tax return must include details of the turnover, expenses and profits of his business. The cost of preparing and completing that part of the tax return is tax allowable as that cost relates to the business and not to the individual’s personal affairs. Where the remainder of the personal tax return requires little effort to complete the Taxman will, by concession, allow the whole of the cost of preparing the sole-trader’s tax return to be treated as a tax allowable business cost.
Question and Answer Corner
A. The Taxman views the cost of a personalised number-plate, over and above what you have to pay to register the car, as an intangible capital asset. Companies can claim a deduction in their accounts for intangible assets acquired since 1 April 2002, but unincorporated businesses cannot. If your business is a company it can write-off the cost of the number plate over a reasonable period, which the Taxman will normally accept to be up to 20 years. If you trade in your own name or as a partnership, your business cannot claim a deduction for the cost, as the number plate does not qualify for capital allowances.
Q. My employer has just paid me a substantial sum described as ‘damages’ to compensate me for an injury I received at work. Will this payment be taxable?
A. Any payment to compensate for personal injury is not taxable. This applies whether the compensation is paid in one lump sum or as a series of periodic payments. Interest paid as part of the damages award is also tax free but interest paid because of the late payment of the award will be taxable.
Q. Can I set-off the losses from my sole-trader business against my employed income for the year?
A. Yes you can set the losses from your sole-trader business against your earnings from your employment from the same tax year, or from the previous tax year. If you started your sole trader business in the last four years, you can set-off the loss against your other income from the previous three tax years. However, the Taxman will need to be convinced that your sole-trader business is a real commercial business and not just a personal interest that you don’t expect to generate a profit from. You will need to submit a personal tax return showing the business turnover, expenses and resulting loss. If your business turnover for tax year 2008/09 is £30,000 or more you will need to provide details on your tax return of the various categories of tax allowable expenses.
Key Tax Dates for December 2009
30 Deadline for 2008/09 self assessment online returns to be filed if you are an employee and want tax underpaid to be collected by adjustment to your 2010/11 PAYE code (for underpayments of up to £2000 only).
VAT reclaim deadline for submission of all claims for non EU traders wanting to reclaim VAT in the UK