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HMRC internal manual

Business Income Manual

Franchising: initial lump sum received by franchiser

Intangible assets regime for companies

Where a company acquires or sells a franchise, the Corporation Tax intangible assets regime applies. The regime is introduced at BIM35501, and covered more fully in the CIRD manual. Where the intangible assets regime applies then it takes precedence over the guidance here.

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 trade profits principles, is usually the same.

Trade profits treatment

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.

You 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.

Revenue receipt:

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

  • the transactions were repeated (franchisers usually have offered, or intend to offer, more than one franchise),
  • there was a deliberate policy of expansion by granting licences,
  • benefits other than know-how were provided,
  • no capital asset diminished in value; know-how can be imparted to others without necessarily diluting its value.

There is also a useful review of the case law by Goulding J (from page 178) in Coalite & Chemical Products Ltd v Treeby [1971] 48TC171.

For guidance on the capital/revenue divide generally, see BIM35000 onwards.