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Under a ‘business system franchise agreement� the owner of an established business format (the franchiser) grants to another person (the franchisee) the right to distribute products or perform services using that system. A wide variety of activities are the subject of franchise agreements.

»Ê¹ÚÌåÓýapp terms of agreements vary considerably but generally the franchisee gets the use of the system and any necessary management back-up for a specified period, of perhaps five to ten years, in return for:

• an initial fee (payable in one sum or in instalments), and
• continuing, usually annual, fees.

»Ê¹ÚÌåÓýapp continuing fees may be calculated as a percentage of turnover, a mark-up on purchases from the franchiser or a regular fixed payment per outlet. Continuing fees are intended to pay for services, which may be required in later years.

It is important to obtain a copy of the signed agreement if a question arises over the tax treatment of a franchise payment/receipt.