Minimising Your Franchise's Tax Bill
As a franchisee, there are several ways in which your tax affairs might be arranged. While many of the larger franchises treat their franchisees as employees for tax purposes, most others will expect you to register as self-employed and take care of your own tax responsibilities.
This confers a number of important responsibilities on you as a franchisee. You will have a legal obligation to keep adequate records and complete an annual Self Assessment tax return. You will also have to arrange to pay your own tax bill; rather than having tax deducted from your pay packet, you will have to make payments in a series of lump sums.
But despite the added responsibilities associated with becoming a Self Assessment taxpayer, you will also see some benefits. Self-employed people are able to reduce their tax bills using a number of perfectly legal methods – and you should be familiar with these if you are to keep your franchise tax bill down.
Allowable ExpensesHM Revenue and Customs recognise that you will have a number of expenditures that are necessary for you to run your business. Most of these can be offset against your tax bill.
These expenditures can be divided into two categories: allowable expenses and capital expenditure. Allowable expenses can be thought of as overheads; professional fees, rent, stationery and so on. Capital expenditure covers single-purchase items like new computer equipment. Allowable expenses are deducted from your total income at the end of each tax year, thus reducing your bill. Businesses also receive an annual allowance for capital expenditure, and purchases within that allowance receive significant tax breaks.
VAT RegistrationAt some point in the life of your business you will have to consider VAT registration. If your turnover exceeds the registration threshold (set at £81,000 for the 2014-15 tax year) you are legally required to register – but even if your turnover is lower than this it may make financial sense to register voluntarily.
If you pay out more VAT than you take in during any VAT accounting period, you will be due a refund from HM Revenue and Customs. In this way, VAT registration can help to cut your tax bill. You should remember, though, that if your output tax (that is, the VAT you charge) exceeds your input tax (the VAT you receive), you will have to pay the difference to HMRC at the end of each accounting period.
Should I Incorporate?Many franchisees choose to incorporate their businesses and limited companies, while others prefer to operate as sole traders. There are potential tax reasons for both of these options, and your decision will depend on a range of factors unique to your business.
But incorporation can help you to reduce your own personal tax bill in some circumstances. As a company director you can choose to pay yourself dividends. This type of payment currently attracts significantly lower rates of tax than regular income and, as a result, many directors choose to pay themselves in this way. It is important to note, though, that dividend payments are carefully scrutinised by HMRC. You should seek independent advice before acting.
Running your own business is hard work. But, with some forethought and efficient record-keeping, you can help make it as cheap as possible from a tax point of view.