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May Question and Answer Corner

Newsletter issue - May 08.

Q. I'm about to pay a significant initial franchise fee. Will I be able to deduct any of that cost from my earnings for my first year of trading?

A. It depends on exactly what the initial franchise fee represents. It may include elements for staff training, stationery, operating manuals, stock, which can be generally deducted from your trading income. However, a large part of the fee may represent know-how or goodwill attached to the franchise brand. This is a capital cost, which may be written off gradually against your profits if you trade as a company. The franchisor should provide you with an itemised breakdown of the initial fee, which we can help you analyse into deductible and non-deductible elements.

Q. Can the sole director of his own company be paid £5 per night when away on business without producing receipts to cover expenses incurred?

A. The £5 per night limit is for personal incidental expenses such as laundry costs and telephone calls, which are rarely supported by receipts. As long as the company does not pay more than £5 per night on average per business trip, the full amount paid will be tax free. However, if the company pays in excess of £5 per night, the total is taxable. Any amount paid or reimbursed by the company for actual personal expenses, such as laundry bills, must be deducted from the £5 nightly limit.

Q. We pay our employees a mileage allowance for business journeys in line with the Taxman's recommended rates. Can we reclaim any VAT in respect of those payments?

A. You can reclaim the VAT but only on the proportion of the mileage allowance that relates to fuel. The mileage rate of 40p per mile has a large element of reimbursement for the vehicle's other running costs. You need to use as a reference point the HMRC advisory fuel only rates which vary according to the size of the car, and are reissued several times a year. For example, if the vehicle has a 1500cc petrol engine and you reimburse the driver for 1000 miles, the value of the fuel used is 13p per mile: £130. The VAT element is 7/47 x £130 = £19.36. However, the employee must supply you with fuel receipts totalling at least £130 to allow you to reclaim the VAT shown on those receipts.

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