Running a franchise in the UK means keeping on top of some quite specific tax rules. Franchising is a popular business model across many industries here, offering entrepreneurs access to a proven business structure used by numerous successful brands.
Understanding what’s expected can help you manage your finances effectively—and avoid unwanted attention from HMRC. Many franchise opportunities are built on a tried-and-tested business model developed and refined by the franchisor, which can make tax planning both more straightforward and rewarding.
Key Taxes for Franchise Business Owners
As a franchise owner, you’ll need to manage several key taxes. Corporation tax applies to profits if you operate as a limited company—currently 25% on profits over £250,000, with reliefs for smaller businesses. Franchise businesses follow the same corporation tax rules as other companies, depending on their legal structure.
If your turnover reaches £85,000, VAT registration becomes compulsory. Most franchises hit this threshold sooner than expected, so it’s important not to be caught out. This VAT limit applies equally to franchise businesses and other companies, regardless of sector.
Income tax comes into play when you pay yourself. Sole traders pay tax on all profits, while company directors usually take a mix of salary and dividends—each taxed differently.
You’ll also need to consider business rates for your premises and National Insurance contributions for yourself and any employees. The nature of your franchise’s services and the industry you operate in can influence these obligations.
Franchisee and Franchisor Responsibilities
As the franchisee, you’re responsible for your own tax compliance—not the franchisor. While franchisors provide training, support, and maintain the franchise system, it’s down to you to:
- File annual tax returns on time
- Keep financial records for at least six years
- Pay all taxes when due
- Record licence fees and intellectual property payments accurately
A handy tip is to open a separate bank account just for tax money. It’s all too easy to dip into funds you’ll owe HMRC later.
You’ll pay licence fees and royalties to the franchisor in return for using their intellectual property and the exclusive rights to operate under the franchise system.
Keep an eye on tax clauses in your franchise agreement. For example, the initial franchise fee might be treated as a capital expense rather than revenue, which affects how it’s taxed. Franchisors usually provide training and ongoing support to help franchisees meet these obligations.
Tax Implications for Different Business Structures
Your chosen legal structure will shape your tax responsibilities as a franchise owner.
Sole traders have straightforward accounts but bear unlimited personal liability, with all profits taxed through Self Assessment. As an independent business owner, you’re responsible for all aspects of your business, including operating under the franchise agreement.
Partnerships split profits among partners, who each pay income tax on their share. While this can be tax-efficient, liability remains unlimited.
Limited companies offer more flexibility for tax planning and provide personal liability protection. Many franchisees opt for this structure because of its tax advantages. You can adjust the balance of salary, dividends, and pension contributions to suit your needs.
Limited liability partnerships (LLPs) combine features of partnerships and companies, offering profit-sharing flexibility with some liability protection.
It’s always wise to consult an accountant familiar with franchising to determine the best structure for your circumstances.
Essential Tax Strategies for Franchisees
Staying on top of tax is crucial for franchisees. The right approach can save you money and spare you hassle with HMRC. Effective tax planning offers clear benefits, including improved cash flow and reduced risk of financial penalties. Franchisees also gain from the support and structure of the franchise system, which provides expert guidance and shared resources to help streamline operations and ensure compliance.
Maximising Tax Efficiency and Reliefs
Several reliefs can ease your tax burden. Operating as a limited company often proves more advantageous than being a sole trader once earnings increase—corporation tax rates may be lower than higher-rate income tax.
Make sure to claim all allowable business expenses—franchise fees, staff wages, rent, marketing costs, and more. Keep your records and receipts organised. Remember, as part of the franchise agreement, franchisees pay a percentage of their sales as ongoing royalties to the franchisor.
Capital allowances can help with equipment purchases. The Annual Investment Allowance lets you deduct the full cost of qualifying assets before tax.
Pension contributions are a smart move, reducing corporation tax while helping you save for retirement. Your company can contribute directly.
If eligible, the Employment Allowance can reduce your National Insurance bill by up to £5,000 annually.
Managing Tax Bills and Payments
It’s wise to keep a separate bank account for tax payments to avoid surprises when bills arrive.
Be aware of deadlines. Corporation tax is usually due nine months and one day after your accounting year-end, while income tax follows a different timetable.
To avoid large lump sums, consider making payments on account—spreading costs throughout the year can ease cash flow.
Review your tax position quarterly. Keeping an eye on sales and market trends helps you plan tax payments and make informed business decisions.
Using accounting software compatible with HMRC’s Making Tax Digital system can simplify this process.
Complying with Reporting and Filing Requirements
Submit your Company Tax Return accurately and on time to avoid penalties, starting at £100 and increasing for continued delays.
If you receive dividends, register for Self Assessment, as these are taxed differently from salary and must be reported.
Keep your financial records for at least six years—this includes sales invoices, receipts, payroll summaries, and bank statements. Maintaining transparency in your tax reporting ensures all financial activities are clearly documented and accessible.
If your turnover exceeds the VAT threshold (£85,000), you must file VAT returns quarterly. Even if below the threshold, registering might be beneficial if you deal with many VAT-registered suppliers. Franchisors often support franchisees with VAT compliance, making the process more manageable.
Don’t forget to file your annual confirmation statement with Companies House. Missing this could result in your company being struck off, which is best avoided.
Practical Tax Tips for UK Franchise Success
If you get your tax affairs right, your franchise is much more likely to turn a healthy profit. Planning ahead really can make all the difference.
Franchise businesses benefit from operating under an already established brand and a business format franchise, ensuring that all franchised locations use the same brand name, deliver the same quality, and offer branded products. This consistency helps franchisees make the most of the reputation and support of a well-known brand, making it easier to attract customers. Franchise opportunities provide a low-cost way to start a new business compared to building an independent business from scratch. The wide availability of franchise opportunities in the UK means entrepreneurs can choose from a range of established brands, each offering a proven franchise model with the support and resources needed for success.
Controlling Costs and Franchise Fees
Most franchise fees are tax-deductible business expenses. This means you can claim both initial and ongoing royalty payments against your profits, helping to reduce your tax bill slightly. Licence fees and royalties are typically paid by franchisees as part of the franchise agreement.
It’s important to keep a close eye on every franchise-related payment. Having a separate category in your accounts just for these costs makes things easier. Keeping detailed records of all payments, including those related to buying the franchise, is essential for tax purposes.
Try to time significant payments to your advantage—aligning them with your accounting period can help maximise tax relief.
It’s worth asking your franchisor if there’s any flexibility with payments. Some are more accommodating than you might expect, which can help with both cash flow and tax planning.
If you’re VAT registered, you can usually reclaim VAT on franchise fees—saving you 20% on some substantial costs.
Maintaining Transparency and Compliance
Keep your personal and business finances separate. Dedicated business accounts are essential for all franchise transactions. The franchise system requires transparency and compliance from all franchisees, and operating within a certain area often involves coordinating with other franchises to ensure smooth running and avoid conflicts.
Arrange regular tax check-ins with your accountant. Quarterly reviews work well to spot any issues before HMRC does.
Stay on top of your income and expenses. Using digital accounting software saves time and reduces mistakes.
Don’t leave your Self Assessment or Company Tax Return until the last minute. Filing early gives you breathing space if anything unexpected comes up.
If you realise you’ve made a mistake on past tax returns, consider telling HMRC voluntarily. They tend to be more understanding when you come forward rather than if they uncover the error themselves.
Supplier contracts can sometimes be specific to one franchisee or a particular area, so review them carefully to ensure you’re complying with the franchise system.
Optimising PAYE and Supplier Payments
If you have employees, make sure PAYE is set up correctly and payroll is processed accurately. Late or incorrect reports to HMRC can lead to penalties you really don’t want.
Payroll software that links with your accounts can ease the administrative burden and reduce errors. Franchisors often provide training and extensive support to help franchisees manage payroll and supplier payments effectively.
Think carefully about how you pay yourself. A combination of salary, dividends, and pension contributions often works out better than taking just a salary.
Build good relationships with suppliers and try to agree payment terms that suit your tax timetable. This can make cash flow less stressful when tax bills arrive.
It’s a good idea to review supplier contracts from time to time—some might qualify for special tax treatment or reduced VAT, depending on what you’re purchasing.
Always keep VAT receipts from suppliers so you can claim every bit of allowable input tax on your VAT returns.
Let Us Help
Navigating the tax landscape as a franchisee can be daunting. At Diamond Accounts, we specialise in helping franchise owners like you optimise your tax affairs while ensuring full compliance with HMRC regulations.
Our team of franchise tax experts understands the unique dynamics of the franchisee-franchisor relationship and how it impacts your tax situation.
We provide:
- Tailored tax planning strategies designed specifically for your franchise business
- Quarterly reviews to identify potential savings
- Advice on capital allowance claims for franchise equipment
- Support with VAT registration and filing
- Assistance with year-end accounts and tax returns
You don’t have to tackle tax complexities alone. Many franchisees miss out on valuable deductions or make errors simply because the process can be overwhelming.
Get in touch today for a consultation about your franchise tax requirements.