What expenses can franchisees claim?

As a self-employed franchisee you are required to register your business and pay income tax, if it is your main source of income.

There is no such thing as “franchise tax”, and in order to keep as much of your hard-earned cash as possible, you must be aware of which expenses you can claim back in order to reduce your tax bill.

Franchisees are entitled to claim back any expenses that are directly related to running their business, as a tax deduction. Allowable expenses include equipment, travel and subscriptions and must be submitted as part of the annual self-assessment tax return.

But what is classed as an allowable expense for a franchisee? As a relatively new career path, it isn’t always straightforward. But it’s important to understand what costs can be claimed so that you can keep as much of your earnings as possible. That’s why it pays to consult a professional accountant who specialises in franchise accounting to make sure you’re not missing out.

We’ll go through how tax deductions work and some common tax deductions in this article, and for more detail please get in touch with us at Elevate Accountancy.

What is a business expense?

As a franchisee, you earn your money from activities. You are required to pay HMRC tax on the profit from these activities, if you earn more than £12,570 per year (the rate for 2022/23 tax year). You will naturally incur some expenses that directly relate to those sources of income, most of which can be claimed back as a reduction on tax. Things like your managed service fee, your phone, travel expenses, legal expenses on contracts and software subscriptions, plus many more.

As a rule, allowable expenses must be wholly and exclusively incurred in running your self employed operation.

For example, you can only claim mileage costs on journeys made for business purposes, not for personal errands.

The total amount of expenses can be reduced from your taxable profit at the end of the tax year, i.e. you can reduce how much tax you pay and keep more of your earnings. Result!

How are franchisee expenses calculated?

As part of your self-assessment tax return, you will be required to declare your total income (turnover). You then calculate your total allowable expenses, and deduct that from your revenue which makes up your ‘profit’.

So you only pay tax on the money you earn after expenses, thus reducing your bill.

Example: Turnover: £24,000

Less expenses: £5,000

Taxable income (profit) = £19,000

Tax bill @ 20% = £3,800

In this example, if no expenses were claimed, the taxable income would be £24,000 and the tax bill would be £4,800. You can see, therefore, that the more expenses you claim, the lower your declared profit and the lower your tax bill.

The headline? For every £100 of allowable expenses that you don’t claim, you lose £20. So make sure you pay tax on your profit, not turnover!

When can you deduct franchisee expenses from your tax bill?

After the end of each tax year, self employed individuals are required to complete a self assessment tax return to HMRC, to declare income they earned for the year.

They are then required to pay tax on all earnings above their personal allowance (which is currently £12,570) .

Within the tax return, there is a section in which you can list all of the expenses that you have incurred and this amount will be offset against your income to reduce your declared profit so that you pay less tax.

Do I need proof of my expenses?

Although you are not required to submit evidence of your expenses (i.e. receipts) with your tax return, you must ensure you have an accurate record, should HMRC query the amount.

That is why it is good to have the services of a qualified accountant, to ensure your records are bang up to date.

What counts as an expense for franchisees?

There are a huge variety of expenses which you can use to pay less tax on your profits. Some of the more commonly seen expenses include office costs (stationery, etc.), travel expenses, subscriptions to online services, advertisement costs, mobile phone costs, equipment, accounting costs and insurance.

Allowable expenses for franchisees

  • Paying franchisor
  • Subscriptions to apps you need for your operations
  • Equipment you buy for use in your operations
  • Your mobile phone subscription
  • Accountants fees
  • Travel costs incurred for business purposes
  • Technology fees
  • Advertising and marketing levy

4 expenses that you didn’t know you could claim as a franchisee

There are some lesser known expenses you can claim which are not always proactively advised by accountants which include:

45p a mile for use of your car for business purposes (you can charge this to your company and receive it tax-free)

“Rent” for using part of your home as an office

Mobile phone costs

Paying franchisor for use of the brand

There is no exhaustive list of what can and can’t be claimed and therefore we go back to first principles to decide whether something is wholly and exclusively incurred for the benefit of your company.

What expenses can franchisees claim for working from home?

If you do most of your work from the comfort of your own home, there are some costs which you may be able to claim.

For example, some franchisees may have a dedicated room, which they only use for their work and never for personal use.

In this scenario, you may be able to claim a portion of your home costs as expenses depending on how big the room is in comparison to the rest of your home.

What expenses are not allowed for tax deductions?

There are certain expenses that you need to be aware of which might not be allowable.

For example, client entertainment costs are not allowable, so think twice before buying the expensive champagne at the restaurant as there are no tax deductions to be had in this scenario.

Free gifts to clients are treated much the same way as entertainment, although, there are certain situations where gifts are allowable (when they have your logo on, for example).

Also, expenses which you would incur whether you had a business or not are not allowed – for example, paying for your food, your gym membership etc.

Clothes are not allowable either, unless you can demonstrate that you only bought them for use in your business and would not have bought them otherwise – or if they have some sort of marketing purpose e.g clothes with your logo on.

 What happens if I claim an expense incorrectly?

There is always a grey area when it comes to which expenses are allowable and which aren’t, which is why it’s always best to speak to a specialist who can advise you on what qualifies and to help maximise what you claim.

If you try and claim something in your tax returns and get it wrong, HMRC can fine you and send you a demand including interest for tax underpaid – not a position you want to find yourself in.

In summary

There is no such thing as “franchisee tax” and self employed franchisees are treated the same as every other business, and as such, can claim a lot of the normal expenses incurred through generating income.

Franchisees lead busy lives and may struggle to find the time to keep track of all their expenses, which is why we highly recommend using a franchise specialist accountant like Elevate.

We can help you keep on top of things and ensure your tax bill is the lowest it can possibly be without falling into any traps that may get you in trouble with HMRC!

Get in touch

Whilst it may seem straight forward to complete your tax returns on your own, if you want to make sure you are claiming everything you possibly can then it pays to consult an accountant such as Elevate.

To find out whether you are maximising your expenses and keeping as much of your profit as you’re entitled to, book a call with us and we’d be happy to guide you.