What Tax Does a Franchise Owner Pay?
As a new franchise owner you will have to pay a variety of taxes. Franchises like any other enterprise are liable for taxes that relate to the business itself such as corporation tax. Taxes that relate to the franchise operation, fuel duty for instance, and of course the personal taxes on you the franchisee.
Franchising businesses are not exempt from any of the usual taxes that small businesses have to pay. The franchise itself gives you a business opportunity, but franchise businesses even with their special format and set-up are viewed just like any other small business for tax purposes by the HMRC.
Income TaxNo matter what kind of business format your franchise business takes, you will have to pay income tax on any income you gain from the franchise opportunity you are taking advantage of. From sole traders to company directors, you have to use the self-assessment system. Company directors in a franchise business even though they will be paid via the PAYE system, still have to file a self-assessment tax return each year. You can read an introduction to self-assessment on the HMRC website: www.hmrc.gov.uk.
National InsuranceFranchising usually attracts people that want to become self-employed. The franchise information you get from the franchisor will usually contain very little information about the taxes you will have to pay. As a self-employed business person you have to pay two types of National Insurance contributions:
- Class 2:This type of National Insurance is a set weekly fee that most self-employed people pay monthly by direct debit. If you expect to earn less than £4,825 in the 2008/9 tax year you can apply for an exemption from this class of National Insurance.
- Class 4:This type of National Insurance is linked to the amount of profit that your franchise makes in any given tax year. The income you declare on your self-assessment tax form is used to calculate this type of National Insurance.
If you intend to operate your franchise as a Company you will be a director. As such you will usually pay Class 1 National Insurance contributions. This is calculated differently to the Class 1 National Insurance contributions your employees pay. Your accountant can help you to ensure your financial records are detailed enough to make your calculations accurate.
Corporation TaxThis tax is usually only paid by limited companies. Franchises can be set-up using any business format from sole trader to limited company. However, most franchise businesses will usually adopt the limited company format. If this is your intention, you will have to pay Corporation tax. You must inform the HMRC that your franchise business is liable for this tax. Failure to do so will result in a financial penalty. You can get more information on the HMRC website.
VATThe franchise opportunity you are using to start your small business will sell goods or services. If your income exceeds £81,000 (the current VAT threshold) you have to register for VAT and start to collect this tax from your customers. As soon as your franchise business passes this threshold you must inform HMRC. Failure to do so will incur heavy fines.
Planning for Your TaxesTaxes are a fact of life for all franchise owners. Handling your tax affairs, however, doesn’t have to be a stressful exercise if you plan accordingly. Use the checklist below to help you manage your franchise tax affairs with ease
1: Hire an Accountant
Even the smallest of sole trader franchises will benefit from hiring an accountant. Their fees are a deductible expense, so you have nothing to loose and everything to gain from their expert help.
2: Keep Detailed Records
Keeping track of your income and out-goings not only enables you to efficiently manage your franchise, it also enables you to compile your tax records quickly, and ensures you don’t pay more tax than you have to.
3: Put Money Aside
Your accountant can give you a rough idea of how much you have to pay in taxes and when these payments will be due. Try and put aside some money to help you save for your tax bills. Put the money in a special holding account with a good rate of interest.
Many of the taxes you will have to pay are mandatory. Look at the franchise information the franchisor will give you to guide your choice of business format that will suite the franchise opportunity you want to take up. This will ensure you are prepared for the taxes your franchise business will attract. And don’t forget to locate an accountant, even before your franchise starts trading.