A short, informal guide to understanding how franchise taxation works for UK businesses.
Running a franchise business is as much about manning multiple fronts successfully at once as it is about business acumen and good choices. Throughout our free franchising guides, we have discussed how choosing a franchise that works for you can take much of the hassle out of your way. In the same vein, it’s important to note that the streak of good decision making needs to continue well beyond the initial phase to make sure that your business is well-run, well-administered and well-looked after.
Staying compliant with all the applicable laws, codes, norms and regulations – along with the ethics of good franchising – is an integral part of keeping your business on the right side of the proverbial line. Paying your taxes is just one facet of the overall compliance. The scheme of taxes for franchise businesses in the UK is quite similar to that for any other business, with a few peculiarities thrown in. Despite this, understanding this system does often prove to be more of an ordeal than a breeze for many franchise owners. This exclusive and informal tax guide from franchise4u will help franchise owners like you put all-things-tax in a simpler perspective.
Disclaimer: This article does not constitute professional accounting or taxation advice.
Franchises Do Need to Pay Taxes as a Business!
Many franchise business owners tend to treat their businesses as an extension of a personal endeavour. While not quite wrong in many cases, this treatment just doesn’t work out when it comes to dealing with the taxes you will be required to pay. A franchise you own and run is, after all, a business. So, regardless of the its size, nature or turnover, it will be reported, treated and assessed as such. Therefore, as the first step of tackling the taxes as a franchise owner, you will need to put in place systems that will keep a good track of the incomings, outgoings, investments, borrowings, operational expenses and other financial streams. More about how to achieve this will follow towards the end of this post.
Common Taxes That UK Franchises Need to Pay
Depending on the size and nature of your franchise business, the exact tax treatment and relevant minutiae will differ. There are, however, a few common and major taxes that almost all franchise businesses are required to pay.
Quite predictably, the income tax ranks right at the top of important taxes that UK franchise owners need to pay each year. Regardless of the industry you operate in or the turnover your franchise registers each year, you will need to file a tax return each year. And, if the net profits registered in a business year exceed the personal allowance (currently sitting at £11,500), you will need to pay an income tax on them, as well.
This is, of course, assuming that you run the franchise full-time as a sole trader and are not employed elsewhere. If your franchise business is only a part-time activity and you draw salary from another employment too, the two income taxes will be calculated separately. The good thing is, running a franchise will rarely affect the tax code you are assigned as a result of your employment.
Further complications arise from the business structure of the franchise and your position therein. For example, if your franchise is registered as a limited company and you hold the position of a director, you will need to pay income tax on the salary or dividends that you draw from the franchise that exceed the personal allowance. In most cases, the salary disbursement systems work within the Pay As You Earn (PAYE) structure. This means that the income tax that you are liable to pay as an ‘employee’ of your own franchise will be deducted directly from your paycheque. The self-assessment returns, however, will still need to be filed each year.
Value Added Tax (VAT)
VAT is one of the most common and widely applicable business taxes in the UK. While the underlying purpose of VAT is to generate a consumer-focussed stream of direct income for the government, many non-commercial entities also find themselves under the purview of this tax. In the most typical scenario, any business that turns over £85,000 in a financial year is liable to pay the VAT. It’s important to note here that unlike the income tax threshold of £11,500, the VAT threshold takes into account the gross sales (derived from sales receipts), and not the profits.
Just like filing the self-assessed income tax return each year, it’s a good idea to have your business registered for VAT even when your annual turnover doesn’t meet the threshold. This will not only give your business a VAT number – an important professional tool – but also keep it primed for growth. There exist three broad VAT rates for businesses that classify services and goods into three categories. The Standard Rate, sitting at 20%, applies to most consumer products and services. The Reduced Rate, currently at 5%, applies to a special class of utility products, healthcare services and other similar items. The third and final rate – the Zero Rate – applies to a variety of daily use goods, services and exports to non-EU countries. You can read more about VAT rates and how they work here.
Another important business tax, the corporation tax applies exclusively to businesses registered as limited companies. As the name suggests, this tax aims to extract contributions from profit making corporations, and if your franchise is registered as a limited company, it will most certainly be required to pay the corporation tax on an annual basis.
Thanks largely to its direct impact on the ease of doing business in the UK, the corporation tax is a longstanding point of debate between the governments, leading analysts and businesses. Due to the growing pressure from other countries overhauling their corporation tax equivalents in the aftermath of the global recession that started in 2008, the corporation tax in the UK has steadily come down to 19% in 2018 from 30% at the beginning of 2008. Further extension of these policies means that the corporation tax will soon climb down to the lowest it ever has been – 17%.
The profit thresholds for the corporation tax for businesses in the UK ceased to exist post 2005. Today, every single pound in profit made by a limited company is subject to the 19% corporation tax, and as a franchise business owner, you may need to keep this in mind while drawing a franchise business plan.
Business rates are also among the most commonly applicable business taxes in the UK. The taxes we have discussed so far in relation with franchise businesses dealt with the performance of a business in terms of the profits or the turnover. Unlike these, business rates mainly deal with the commercial occupation of space by businesses. Businesses that occupy commercial properties are all subject to varying business rates.
Therefore, if your franchise business operates from a commercial property such as a shop, an office or a warehouse, your business will need to pay the applicable business rates. On the other hand, if your franchise business is run out of your home, you may only need to pay the local council tax. This, however, is a highly subjective matter that is best checked with accounting and tax experts.
To calculate the business rates your franchise business will have to pay this year, please visit this link.
National Insurance (NI)
The National Insurance is a social benefits tax scheme that has been, in various forms, in place in the UK for over a century. Under this tax scheme, the employers and employees are expected to contribute a certain sum of money on a weekly or monthly basis to the National Insurance Fund that looks after various social benefits, retirement funds and other similar expenses for the government.
As the owner of a franchise business, you will be expected to set up the National Insurance debit protocols for yourself as well as your employees. There are three main classes that franchise businesses fall under in regard with the National Insurance: Class 1, Class 2 and Class 4.
Recommended: A franchise owner’s guide to business insurance
Efficient Bookkeeping for Franchise Businesses
The importance of adopting professional ways while running a franchise business just cannot be overstated. This is evident when it comes to bookkeeping – an immensely important part of all business operations. From keeping a neat track of the sales receipts and customer invoices to always staying on top of the supplier bills, loan repayments and franchisor royalties, every single business related transaction needs to go on record. A small enough franchise can choose from a number of softwares available to get this job done to perfection. Efficient, non-complicated and handy bookkeeping can greatly simplify the calculation of taxes.
Should a Small Franchise Business Hire an Accountant?
As things stand today, hiring an accountant to help your franchise business navigate the tricky taxation system appears to be a no-brainer. Professional accountant can not only put your business finances in order but also help you organise your investments, borrowings and operational expenses. Moreover, many accountants offer à la carte accounting services, thereby greatly reducing the expenses incurred to you. In addition, the fees paid to the account are classified as business expenses and are tax deductible.
- Know all the taxes your franchise business will be required to pay.
- Make regular savings to ease the burden of paying taxes at the end of the year.
- Adopt efficient bookkeeping practices.
- Hire a professional accountant.