Tax Advice for Franchisors and Franchise Owners based in Northern Ireland

If you are a successful franchisor or franchise owner then from April 2010, if your annual income is over £150,000 you bear the brunt of the proposed income tax increases. It is a huge 25 percent increase - from 40 percent to 50 percent - in the top rate of tax on your earnings and savings income. The rate at which your gross dividends are taxed will also rise from 32.5 percent to 42.5 percent - a whopping increase of 44.4 percent in the effective rate on your net dividends (from 25 percent to 36.1 percent)!

What can directors, employees, shareholders, sole traders and partners do to soften the blow?

In the first instance, it may be possible to delay the effect of the changes by up to a year. Secondly, more fundamental action could avoid some or all future profits being subjected to the 50 percent rate. However before taking action take advice from a specialist firm of franchise accountants.

How can the effect of the changes be delayed?

Here are some ideas which would all result in income being taxed at 40 percent in 2009/10 rather than 50 percent in 2010/11:

  • Sole traders and partnerships could consider changing their year end (for example, from 30 April 2010 to 31 March 2010). Overlap relief could substantially reduce profits (or even create a loss). However, a change would bring forward the time at which tax would be payable on future profits.
  • If directors or employees are holding share options that will result in an income tax liability,they could consider taking these before 6 April 2010.
  • Franchise businesses could consider bringing forward the date of a bonus payment to directors or employees (for example, from May 2010 to March 2010).
  • Similarly, franchise companies could consider bringing forward the date of a dividend payment to before 6 April 2010. If necessary, funds could be loaned back to the franchise company.

Looking Ahead

When it comes to mitigating the higher rates of tax in future years we have detailed below a few areas for consideration, however once again it is well worth taking advice from specialist franchise accountants prior to proceeding.

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  • Partnerships (including limited liability partnerships, LLPs) could consider admitting a corporate partner. The corporate member's profit share would be taxed at a lower rate, and it could also provide services to the LLP. This route is likely to offer more scope and flexibility than with a simple service company. However, care would be required if there was a possibility of losses arising, as loss relief for corporate partners may be restricted.
  • Franchise companies could simply retain surplus funds instead of immediately distributing these to be taxed at higher rates in the recipients' hands.
  • If you operate as a sole trader or partnership with large payroll or other service costs you could consider using a limited company to administer and pay these costs for a fee which would escape the 50 percent rate. There is of course a limit on the level of fee that can be charged without HMRC raising questions.
  • It was thought that the new top tax rate could lead to more sole traders and partnerships (including LLPs) considering incorporation. However, if all profits are distributed, the limited company route will only be more tax-efficient if the small companies corporation tax rate applies. In that case, the overall effective tax and national insurance rate for 2010/11 will be 49.53 percent where all profits are distributed by dividends, compared with 51 percent for unincorporated businesses.

    The content of this article is for information purposes only and should not form the basis of any decision as to a particular course of action.

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    This Newsletter does not constitute legal, accountancy or regulatory advice. Specialist advice should be sought in relation to your own circumstances.