For companies acquiring or selling franchises after 31 March 2002, a different tax regime to that described here is likely to apply. This is the intangible assets regime for companies, 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.
Generally, the annual fees which are payable will be an
allowable expense (whether under the intangible asset regime or by
normal Case I rules), but the initial payment, whether payable in
one sum or instalments, is usually capital, as are any related
legal fees.
An initial fee will remain capital expenditure if paid by
instalments over a number of years. In S Ltd v O'Sullivan (Irish
Tax Cases 108), the judge held that a predetermined sum payable in
instalments by an Irish company for access to an English company's
know-how for a period of 10 years was capital. Although an Irish
case, the judge was following Viscount Cave's approach in Atherton
v British Insulated and Helsby Cables Ltd [1925] 10TC155, see
BIM35010.
For further information about the Capital Gains Tax
implications see CG68270 – CG68280 onwards.
In some cases, the franchise agreement may show that the
franchiser charged a specific part of the initial fee for an
allowable expense such as the training of staff.
Whether an apportionment between revenue and capital
expenditure is appropriate depends on the facts. The facts may show
that no part of the initial lump sum fees can be attributed to
services of a revenue nature provided by the franchiser because
such services are separately charged for in the annual fees.
In practice, franchisees may put forward an apportionment
without reference to the franchiser. An apportionment of this type
may be difficult to justify in relation to the services provided.
For instance, some franchisers are unwilling to negotiate special
terms with individual franchisees and the same lump sum is payable
irrespective of the actual services required from the franchiser,
for example the number of staff needing training may be irrelevant.
If the agreement terms are such that no part of the initial
fee is specifically attributed to revenue items then the claim for
apportionment may need to be critically examined.
