For companies acquiring or selling franchises after 31 March 2002, the intangible assets regime is likely to be applicable, and it is introduced at BIM35501, and covered more fully in the CIRD manual. If the intangible assets regime applies then it takes precedence over the guidance below. However, since the initial lump sum fee is normally a revenue receipt for the Franchiser, then the treatment under either the intangible assets regime, or by normal Case I principles will usually be the same.
Initial sums are generally intended to be consideration for the
grant of the franchise and also perhaps, the initial services of
the franchiser.
Lump sum fees are normally earned when the initial services
are provided.
Inspectors should critically review cases where initial sums
are spread. Before challenging a timing basis adopted in the
accounts see
BIM31000 onwards and
BIM34000 onwards.
The franchiser has not disposed of any goodwill. The franchiser’s goodwill may even be strengthened by the extension of its reputation through franchising. For further guidance on this point see CG68270.
As noted above, the initial lump sum is normally a revenue
receipt in the hands of the franchiser. This is supported by the
House of Lords decision in the case Jeffrey v Rolls-Royce Ltd
[1962] 40TC443, where the company made agreements with several
overseas companies for the sale of know-how relating to aero-engine
manufacture. The view of the House of Lords was that the repetitive
exploitation of know-how was simply an extension of the existing
trade. The lump sums received under these agreements were held to
be revenue receipts.
Most of the reasons for treating Rolls Royce's receipts as
revenue are equally applicable to franchising receipts, for
example
There is also a useful review of the case law by Goulding J (from p.178) in Coalite & Chemical Products Ltd v Treeby [1971] 48TC171.
