Talk the franchise proposition through with an accountant. If you still think it is a good proposition, decide on the business structure (e.g. Limited Company), bookkeeping records and VAT registration, as with any business.
Franchisees often pay a large lump sum for a number of different costs – but without paperwork to show the split between the various items, it’s potentially a big problem for your accountant.
Example: a franchisor may ask for £10,000 to cover: the licence; initial stock; equipment; training and support for several years. Each of these costs needs a different accounting and tax treatment – so get a breakdown with the costs for each individual item. Without this, HMRC could seek to treat all costs as Capital expenditure resulting in a higher tax bill for you – at least in the first year of the business.
- Capital allowances – tax relief on fixed assets
- 100% write off of capital items using AIA
- Current annual level - £200,000
- Writing down allowance claims when annual limit exceeded
A Limited Liability Partnership (LLP) is safer than a typical Partnership, just as a Limited Company is safer than a Sole Trader business.
Safer because: The advantage an LLP has over a Partnership is that partners in LLPs are not personally responsible for the LLP’s debts. The business debts of the individual are ‘limited’ and their personal assets are safeguarded just as in a Limited Company.
Tax savings: Since December 2013 and the Mixed Partnership Rules, neither normal partnerships nor LLP’s are generally as tax efficient as Limited Companies. However there is usually more flexibility in how you pay individual partners though either a partnership or LLP than through a Limited Company
There are many reasons for not choosing a Partnership in your position, for instance:
- They are less tax efficient than Limited Companies
- Partners must pay Class 4 National Insurance
- All Partners are responsible for all debts
- Partnerships can result in disagreements if there is no legal agreement. (A Limited Liability Partnership could be better).
Here are some advantages to a Partnership over a Limited Company structure:
- Income can be apportioned more flexibly between Partners (but please get a legal agreement)
- The rules are less rigid than for Company dividends.
- Partners’ cars can be more easily used to save tax
As a VAT registered IT consultant I invoice an Agency for my time. Occasionally, I recharge expenses for travel and accommodation. My Agency refuses to pay the VAT on these recharged expenses – saying they are a ‘disbursement’ and VAT shouldn’t be applied. I’m out of pocket. Is this right?
No, this is wrong. I have come across this before. Your recharged expenses are part of the supply of your services. If your services are a ‘Standard Rated Supply’, with VAT at 20%, then you must charge VAT on both your time, and your recharged expenses. You could try this; if an item doesn’t include VAT (i.e. train tickets), you should invoice for the amount shown on the receipt; then add VAT separately onto the invoice. For items that already contain VAT, write the net amount in your invoice then separately write the VAT amount in the VAT section of the invoice.
I want to set up a Limited Company but I’m nervous about being a Director.
Becoming a Directordoes include legal responsibilities. For example, Directors must act in the best interests of their Company, and not allow it to trade if they believe it will be unable to pay its debts. They must also ensure that it complies with employment laws, health and safety regulations and keep proper accounting records.
All Limited Companies must appoint at least one Director. No Director should be ‘barred’, bankrupt, or under 16. See Gov.UK Running a Limited Company for the rules.
So long as you are sensible, the advantages of a Limited Company – such as tax savings and limited liability - are worth the extra legal responsibility. I suggest you speak to an accountant for further advice
- Identifying when you pass and fail the IR35 Rule
- The difference between a Contract for Services and a Contract of Service
- The importance of Control
- Mutuality of Obligation
Firstly, you should consult a Financial Advisor when deciding to set up a pension scheme.
Currently, if the Company pays for the contributions, you and your wife will effectively share the tax relief. Whereas, if you make the contributions from your own income after taxes, you receive all of the tax relief. So, if one of you is a Higher Rate taxpayer (income over £45,000) then it may be worth trying to set the tax relief against that person
However, since April 2016, the new dividend tax has made company pension contributions much more advantageous than personal pension payments paid from dividends.