CHAPTER ONE – GROWTH OF THE EQUESTRIAN INDUSTRY

Chapter 1 explores the following subjects:

• Are horses agriculture? (1.2)

• Benefits of sole trade/partnership (1.3)

• Decision to incorporate the equine business or not (1.4)

• Making hay for horses (1.5)

• The modern farmer with liveries, haymaking and the environment (1.6)

• The impact of the Vigne (UT) tribunal case on liveries (1.7)

• The riding school (1.8)

• The racehorse trainer does not just train racehorses (1.9)

• Survival of the small racehorse trainer (1.10)

• The racehorse owner, the costs and prize money (1.11 to 1.18)

• Trade or a hobby (1.19)

• Breeding and owning competition horses (1.20)

• Livery yards in general (1.21)

• Employing family members in the equine industry (1.22)

• Polo (1.23)

• Showjumping (1.24)

• Eventing (1.25)

• Dressage (1.26)

• Point to Point (1.27)

• Business sponsorship and racing (1.28)

• Racing clubs (1.29)

• Bloodstock agents (1.30)

This opening chapter discusses the ever-growing equestrian industry and its diversification opportunities for farmers and landowners. We touch on the business structures and their relative benefits as well as the possible tax implications. We consider the tax benefits and pitfalls of holding an equestrian business on farmland with consideration of activities away from the farm, as a sport and a hobby.

Key issues considered are:

• The tax treatment of making hay for horses

• The impact of the Vigne tax tribunal on liveries

• Horse ownership can be ‘tax free’

Introduction

1.1

The equine industry has grown dramatically over the last few decades. Some would call this the ‘golden glow’ of the 2012 Olympics and the strong results of our competitors since that date together with the need for alternative, profitable uses of farmland.

Many areas of equine activity are increasing in popularity and there are clear signs of commercial growth. There is also increased interest in the ‘pony-paddock’ culture whilst the need for farm diversification is also having a positive impact. Websites to consider when reviewing equine tax planning are:

• www.thehorsemensgroup.com

• www.thetba.co.uk

• www.racehorsetrainers.org

• www.weatherbys.co.uk

• www.hmrc.gov.uk

• www.butler-co.co.uk

There are many other equestrian disciplines which are also currently thriving, such as endurance riding, showing and the whole area of the sports horse generally.

The decline in the farming industry has meant the sale of a large number of ‘pony paddocks’ to link to houses which has the combined benefit of increasing the value of the house and letting the farmer command a very commercial price for a small area of agricultural land. It is for this reason that there are so many ponies to be seen in paddocks around the countryside whilst there has been a big move away from the riding school (see 1.8).

There is a sports horse society and also a society for each breed of horse in the UK and they all tend to have a very enthusiastic following.

All these activities have created numerous equestrian businesses such as show yards, as well as the buying and selling of show horses and competition horses. To support all of the growth, there are a large number of freelance instructors (see 5.22), farriers and saddlers etc, which, all together, present a picture of a thriving equine industry.

The result of all the different areas of the equestrian business means differing approaches to commerciality must be taken (see 3.2 to 3.12 and 7.2). Each equestrian business has to be looked at on a case-by-case basis and all tax planning tailor made.

This book questions how the growth in numbers involved in this area of activity and its evident popularity can be treated tax efficiently by the commercial businesses involved in the sport. It also sets out the tax ‘pitfalls’ to the tax adviser and equine participant where planning has not been put in place.

Are horses agriculture? The fall back of BPR

1.2

Post the Budget 2021 and “Tax Day” 2021 the Inheritance Tax (IHT) reliefs for Agricultural Property Relief (APR) and Business Property Relief (BPR) have survived any change and consultation.

Stud farming is ‘farming’ for tax purposes (see 7.1), the ordinary meaning of which is considered to be husbandry, i.e. the raising of livestock (see 2.2 and 2.9).

In the tax case of Wheatly v IRC (1988) STC (SCD) 60 (see 2.33 and 7.23), the decision of which has been deemed flawed by many, it was accepted that a meadow constituted pasture for the purposes of inheritance tax. However, since the horses in question were used for leisure pursuits they could not be said to be “connected with agricultural activity or with stud farming” and they were not, therefore, involved in agriculture. This judgment is, however, at odds with the accepted tax principle that the activity of growing grass can be regarded as an act of husbandry given that it is a ‘crop’, and grass lettings are currently taxed as farming income, provided the ‘landlord’ meets certain criteria and can generally gain vacant possession within 12 months. Thus it is surely arguable that such property ought to be regarded as within the definition of agricultural property (see 1.5 and 7.1) irrespective of the way in which the crop is exploited or utilised, i.e. grazed by horses.

Unless there is a stud activity that will qualify for agricultural property relief (APR) (see 7.17), the equine activity will have to rely on business property relief (BPR) (see 7.21) for inheritance tax relief (IHT) purposes.

Benefits of sole trader/partnership

1.3

The unincorporated business plays an important, if not vital, role in the equine world. Many, if not most, businesses start their life as a sole trade or partnership.

The key initial tax planning point for the equine business is that an unincorporated structure is also preferable if the early years are likely to produce trading losses. A sole trader/partner would normally be able to claim prompt repayment of income tax by making a loss relief claim against their total income. If such losses fall within a company, they could not be relieved until it generated profits.

There are no legal formalities in establishing a partnership (other than one under the Limited Partnerships Act 1907 or the Limited Liability Partnerships Act 2000) and a written agreement is not necessary, although it is advisable. The mutual rights and duties of partners, whether ascertained by agreement or defined by the Partnership Act 1890, may be varied by the consent of all the partners, such consent being either express or inferred from their actions (Partnership Act 1890 s19).

Whether or not a partnership exists is a mixed question of fact and law, and it is obviously more difficult to prove the existence of a partnership if there is no written agreement. But the mere existence of a written agreement is not proof, and it must be supported by the facts (see, for example, Dickenson v Gross KB (1927) 11 TC 614). HMRC may require proof that there is a partnership by requesting sight of contracts, agreements, VAT registration details and bank accounts. On the other hand, a partnership may be regarded as existing even though the individuals considered they were not partners (Fenston v Johnstone (1940) 23 TC 29). There are many cases in which the existence of a partnership has been reviewed by the courts.

Many equine businesses – and some accountants – do not understand the legal difference between ‘jointly owned property’ and ‘partnership property’. The former is where the equine owners own the property together in joint names. The latter is where the legal owners hold this in trust for the partnership. The key tax point here is that partnership property achieves 100% BPR for IHT, whereas non-partnership property achieves only 50% BPR. To consider the tax position of the farm in more detail, it is important to identify and distinguish between the land and other assets, and how they are being used in a partnership. The research here can be from Land Registry, a review of the legal title, and a consideration of the partnership accounts, together with understanding the intent of the partners.

If the equine business is partnership property, it should be reflected in the value of the business itself as an entry on the balance sheet allocated to the specific partners who own it in their specific proportion. Partnership property will achieve BPR at the rate of 100% (see s104(1)(a) and s105(1)(a) of the Inheritance Act 1984 (IHTA 1984)).

Decision to incorporate or not

1.4

The decision to incorporate must not be undertaken lightly. Once a company is formed, for the decision to be reversed it has to be sold, wound up or ‘struck-off’. Trading through a company is looked at in Chapter 8 (see 8.17).

Accounts have to be filed at Companies House and there are administrative concerns that should be given consideration, as well as the tax advantages and disadvantages. In some cases for equine businesses the tax disadvantages can be punishing.

Over the last decade, many professional practices such as equine vets have incorporated their partnerships subject to their professional body’s approval. Likewise, with farriers and other successful equestrian establishments. Once a certain level of profit has been achieved, a company may now offer many clear advantages over a sole trade or partnership, but the equestrian world must not be unduly influenced by this incorporation fever. Some influence will come from the new “super deduction” of 130% for qualifying expenditure which is restricted to companies (see 2.17).

Making hay for horses

1.5

It might be thought that the treatment of hay for tax purposes is of minimal importance. However, we should bear in mind environmental encouragement of subsidies that “enhance the natural environment”, which could include cultivating wildflower meadows (see 1.6). Fields used for hay cover a substantial part of the UK landscape and are of importance to the equine industry. HMRC could therefore use this change from production to environmental activity to its advantage. Such a move might become an issue, for instance, on the death of a farmer who has perhaps diversified from traditional farming in later years to haymaking with other letting activities. Increasingly, the department is taking a negative approach to ‘horse haymaking’, arguing that such activity does not qualify for agricultural property relief. Such action has worrying consequences for the farming community on the claiming of future tax reliefs.

The consensus has always been that a ‘farmer who makes hay is a farmer’, regardless of whether they are growing a crop to be consumed by livestock or horses. The potentially negative response to such an assumption might now arrive as a shock to many beneficiaries of estates that include haymaking for horses and whose inheritances are under attack from HMRC.

If the hay is sold for consumption by horses, HMRC may incorrectly argue that the sale is not an agricultural activity under IHTA 1984, s115 (see 1.2 and 7.17). The department contends that, unless the hay is sold under s115(4) for ‘the breeding and rearing of horses’, it does not qualify for agricultural property relief. Likewise, HMRC allows hay sold for working horses or horses used in the food chain to qualify for the relief. Many farm advisers and family members who are denied the relief due to the sale of horse hay would certainly argue that such an approach is wrong.

To qualify for agricultural property relief (APR – see 7.1), property must be occupied for ‘agricultural purposes’. Agriculture is not defined in IHTA 1984, but HMRC’s Inheritance Tax Manual provides some useful guidance on land uses that would fall within this category. For example, the fact that energy crops qualify as agriculture is promoted by many influential sources in the tax and farming worlds. Indeed, it is supported by the guidance at IHTM 24062. HMRC also agreed that the relief would be given for growing and selling turf in Assessor for Lothian Region v Rolawn Ltd [1990] SLT 433.

Notably, Assessor for Tayside Region v Reedways Ltd (1982, unreported) illustrates the basic requirement of cultivation. In this instance, the absence of tilling, sowing and cultivating precluded reed beds from being agricultural. Therefore, in light of the above, hay that is grown and harvested for consumption by horses used for pleasure should attract the relief. If HMRC attacks horse haymaking, the problem for those in need of inheritance tax reliefs is twofold:

• The possible loss of agricultural property relief on the farmhouse for stud; and

• The possible reduction of this relief to 50% on land if it is used in a partnership but is not partnership property.

Although in The Estate of Maureen W Vigne (Deceased) v HMRC [2017] UKFTT 632 (TC) (see 1.7) (this case was won at Upper Tribunal) the focus was mainly on business property relief and livery customers, the tribunal also decided that an agricultural property relief claim under IHTA 1984, s115 and s116 for the hay field would have failed. This was because no hay crop had been taken by the business in the two years before Maureen Vigne died. This apparent ‘failure’ is increasingly raised by HMRC, which quotes the tribunal’s reasoning that “Equine activities are not usually characterised as agricultural.” Certainly, the hay was used to provide the livery horses with feed during the winter, yet it is arguably a misconception that the ultimate consumer of the hay was the reason for denying the relief. The tribunal stated:

“It fails because the evidence given by Mr Vigne was that, although from time to time a hay crop is taken from the ‘hayfield’, that had not happened in the two years prior to the deceased’s death.”

However, this should not affect the position if there is substantial and continuous haymaking. This must qualify under the normal definition of agriculture, which is the cultivation of the soil to grow crops. For the Vigne business, there were only 30 acres and an occasional hay crop. If haymaking is substantial, advisers must continue to argue that this is agriculture.

 

The modern farmer with liveries, haymaking and the environment

1.6

It is a common occurrence in the farming industry for a ‘traditional’ agricultural farmer to move to letting agricultural buildings, providing livery and supplying hay as they grow older and become less physically able to undertake other farming activities. Unfortunately, this carries the risk of losing inheritance tax reliefs from all directions and APR and BPR on livery operations (see 2.2, 7.1 and 7.24) and haymaking are clearly under attack. It seems that animals used in the food chain can provide and protect excellent tax reliefs yet moves away from pure husbandry to horses could be punishing in tax terms for the farming and rural community.

When undertaking inheritance tax planning for farmers and equestrian businesses in advance of death, the question of to whom the hay is sold must be forensically analysed. Likewise, when completing form IHT400 after death, the raising and growing of animals, grass and hay must also be understood. Further, HMRC is likely to give the matter serious consideration. With greater emphasis on the cultivation of wildflower meadows under Mr Gove’s original promotion of a green Brexit and the priority of stewardship, the tax position must be reviewed. If HMRC is being unduly aggressive about haymaking for horses, strong, solid arguments must be presented and defended.

Natural capital refers to all the elements of the natural environment – soil, water, wildlife species and habitats, forests etc. Farmers can be paid for creating environmental benefits or maintaining natural resources that provide value to wider society. By identifying and evaluating the amount of natural assets (such as clean water, carbon-capturing plants and healthy soils) on a holding, the equine business can include this capital within a business model. When well-managed, natural assets provide many benefits to humans, from food and drinking water to recreational spaces and carbon storage by measuring and valuing these natural capital assets they can be managed to maximise the environmental benefits.

The impact of the Vigne UT tax tribunal case on liveries

1.7

Much tax planning attention has been given to the positive First-Tier Tribunal result in the IHT case of Vigne v HMRC [2017] UK FTT 0632. The case has since been won at Upper Tribunal HMRC v The Personal Representative of Maureen Vigne (Deceased) [2018] UK UT 0357. The primary question being debated in this case was whether the horse livery activity under consideration was “mainly holding investments” (see 7.21) and therefore would fail in the claim for business property relief (BPR) (see 1.2) by the executors. Whilst this claim was successful, it may have been somewhat overlooked that the claim for APR was denied (see 1.5). The key BPR point in Vigne was that the FTT considered that the Upper Tribunal judgement in Pawson (HMRC v Pawson [2013] UKUT50) was flawed:

“The critical question however is whether these services were of such a nature and extent that they prevented the business from being one of holding Fairhaven as an investment”.

The judge in the FTT in Vigne recorded that the decision in Pawson was flawed. The judge in Vigne considered that it was wrong to start on the preconceived idea that the business is wholly or mainly holding investments and then ask whether there were factors indicating to the contrary. The judge in Vigne considered that the proper starting point is to make no assumptions one way or another and to determine the facts.

The business in question was a livery but argued that “A hay crop was grown on part of the land referred to as the hayfield”. This hay was used to provide the horses with feed during the winter months, one of the ‘enhanced services’ offered by the livery operator. However, whilst it was noted that a hay crop was occasionally taken, the fact this had not happened in the two years prior to the deceased’s death forced the Tribunal to question its qualification for APR.

“48. The appeal was also put on the basis that agricultural property relief should be available. In that regard, the appeal fails. It fails because the evidence given by Mr Vigne was that although, from time to time, a hay crop is taken from the “hayfield” that had not happened in the two years prior to the deceased’s death. Again, the task of the Tribunal is to look at the matter realistically, and ask whether an objective observer, on the basis of the factual situation as we have found it to be, would properly consider agricultural activities to be carried on at or on the land. It is our judgement that if that question is asked, it must be answered against the appellant. Equine activities are not usually characterised as agricultural.”

As noted in 1.5, this passing comment by the Tribunal and reference to the enactment of s115(4) of the 1984 Act regarding breeding and rearing of horses on a stud farm have already opened ‘a can of worms’ for the average ageing farmer who starts reducing his selling of livestock and then takes on a few liveries and makes hay. If HMRC is to attack the sale of hay for the consumption by horses as a non-agricultural activity in accordance with s115, this farmer’s IHT planning may well be lost, despite having worked 80% of his life as a ‘farmer’ in the traditional sense.

Notably, the ‘objective observer’ that denied APR in this case was also the viewpoint taken when reviewing the evidence of the ‘enhanced services’ provided by the business for BPR.

“45. …We are satisfied that any objective observer who had visited the site 2008-2012 would have concluded that a business was being run from and on the land which did provide services to those who kept their horses on the land and that no properly informed observer could or would have said that the deceased was in the business of ‘holding investments’.”

The ‘common sense’ approach taken by the Tribunal with regards to the BPR claim has been noted by many, no doubt attributable to the quality of evidence provided by the executors. For example, it was acknowledged that the various yard managers over the years were remunerated and this was reflected in the accounts, with evidence showing they worked circa 20 hours a week (paragraph 30). Furthermore, in paragraph 36 it notes “the Yard Manager would have (or be expected to have) a BHS stage 4 (or similar) qualification in equine management, which, we are satisfied, would not be necessary for grass or DIY livery provision”.

The existence of a business plan (see 1.15) and the following through of this with an application for planning permission, albeit unsuccessful, was deemed indicative of “expansion of the business and the perceived need for the Yard Manager to be resident on site” (paragraph 32). Moreover, the Tribunal stated in para 43 that “the accounts do not bear the hallmark of the Accounts of a purely investment business.” and indeed rejected HMRC’s claims that, for example, the inclusion of the removal of manure, fencing and pasture maintenance under the heading ‘property maintenance’ should not be seen as having a duality of purpose as clearly no such costs can be referable “entirely to the running of the livery business or to holding the land as an investment.”

The case of HMRC v The Personal Representative of Maureen Vigne (Deceased) [2018] UK UT 0357 turned on whether the operation of livery stables was a business (thus qualifying for BPR) or consisted ‘wholly or mainly of…making or holding investments’ (IHTA 1984, s 105(3)) and serves as welcome pony paddock guidance.

The Upper Tribunal confirmed that the correct test had been applied to the case by the lower tribunal and emphasised that HMRC’s view – that there was a presumption that land constituted an investment unless it was proved otherwise – was incorrect. The open-minded starting point advocated by the First-tier Tribunal in its decision was held to be correct. Further, the intention of the business owner was deemed to be useful as an indicator if cases fall within the grey area on the ‘spectrum of holding investments or trading’ and therefore qualifying for BPR.

The case highlighted the nature of the extra services, as well as the intention of the business owner or landowner. However, many argue that the decision has not made satisfying the BPR test of s 105(3) any clearer. There is a spectrum of land exploitation with clear investment and clear trade at either end, and this is referred to by the tribunals.

All of the above, along with the strip grazing, carrying out of the worming service for the customers, providing hay, and undertaking a daily check of the general health of each horse, were seen as services that go beyond ‘holding investments’ and resulted in a successful BPR claim. Yet, the evidence to support an APR claim was comparably lacking.

The rejection of the APR claim (see 1.2 and 7.1) on Vigne is arguably a further blow to the potential IHT burden of traditional farm diversification into liveries. However, equine and farm advisers must look at all livery operations, and indeed any diversified activities, in terms of both the BPR (see 7.21) and APR implications. Whilst on a practical level farm tax advisers are frequently finding that HMRC is raising the ‘failure’ of the APR claim in the Vigne case, it is important to recall that in Vigne the activity was only for occasional haymaking, with no haymaking in the past two years, on only 30 acres of land. Where a farming operation involves substantial haymaking activity combined with liveries, we must continue to argue that growing and harvesting a crop of grass is agriculture, irrespective of which animal species eats the hay or the grass. In addition, advisers must be sure to have sufficient supporting evidence of the activities undertaken. As many commentators have observed Vigne will prove to be a very important case and all advisers must follow developments on the case.

The riding school

1.8

Riding schools generally offer a wide range of equine-related activities and training, including lessons and tuition (see 5.22) at all levels, holiday accommodation, trekking and hacking, show jumping tuition, dressage, etc. They may also offer ancillary facilities such as all-weather or indoor sand schools, full, part or do-it-yourself livery, holiday accommodation and tack and equine supplies. Some riding schools are small-scale and offer only basic facilities, whilst at the other extreme, they may have a whole team of British Horse Society (BHS) qualified instructors and quality horses/ponies. Once the VAT registration limit has been exceeded, however, the VAT-registered business will often have to charge VAT inclusive prices roughly equal to its non-registered competitors (see Chapter 5 generally for VAT). This means that margins are often reduced, with the effect that larger organisations often have a lower gross profit than smaller ones. Apart from the relatively few cases where a customer is VAT registered and can recover the extra money, prices have to remain competitive.

Proprietors of such businesses often have to be willing to work long hours, since many people, particularly in spring/summer, prefer to take their riding lessons in the evenings. Whilst courses of lessons may be paid for by cheque, individual lessons are usually paid for in cash, making this business an ideal target for HMRC’s compliance teams who historically mistrust ‘mainly cash’ businesses.

Any riding school will come under the BHS licensing provisions and although historically, most livery operations did not come within the operation of the licensing provisions of riding schools they are now being encouraged to join the scheme set out at 1.21 below.

The chief objective of the licensing provisions is to ensure that horses are properly fed, accommodated and cared for. However, there are also provisions about the supervision by responsible persons of horses which are hired out for riding unless a rider is competent to ride without supervision. The licence holder must hold an insurance policy covering him for liability for injury suffered by persons hiring horses for riding. The licence holder must also keep a register of all horses up to the age of three which are kept on the premises, and these horses must not be hired out for riding or used for riding instruction on payment.

The combination of the costs of the compliance with the BHS licensing provisions, business rates and the insurance costs associated with protecting against risk have caused a decline in the traditional riding school. Many have been making a loss and are unable to compete on price with the smaller unlicensed operations.

The structure of the equine business world has moved away from riding schools over the last 30 years. The casual rider has almost disappeared as there are so many other forms of leisure activities available. There has been a growth in general ownership, with many horses being kept at home or at a small livery yard. Lessons are now often given by freelance instructors and generally everything is dealt with below the VAT-registration limit. The collapse of farming has resulted in paddocks being sold at high prices to large houses in order to facilitate the keeping of horses. Small farms have been sold as potential equine establishments.

In short, the riding school is not necessarily where the pupils learn to ride. There has been a restructuring of the industry.

A racehorse trainer does not just train racehorses

1.9

Trainers fall into three basic categories, those training their own horses, those of relatives under a permit, and those training horses for the general public. A trainer may have any number of horses, from one to two hundred, in his yard. Many trainers operate as a sole trader; however, some are salaried employees of an individual or employees/directors of a company.

A trainer’s income mainly consists of training fees, although some trainers operate racing clubs in which individuals pay an annual subscription for a share in a syndicate owning one of the trainer’s horses, together with other benefits such as hospitality at the racecourse on race days. Trainers incur large overheads, notably in payment of staff and the purchase of feed, hay and tack. Other expenses such as veterinary costs and the costs of transporting horses to and from the races may be charged to the individual owner or may be borne by the trainer and then charged in an all-inclusive training fee.

A racehorse trainer does not just train horses. A racehorse trainer needs a skill base at least equal to and arguably greater than the average small business owner. So what skills are required for training?

Marketing:	Attracting owners, requiring charm, confidence, previous winners and entertaining are essential.
Public relations:	Keeping owners happy. Having a positive profile together with press and possibly TV coverage. Role models such as Jenny Pitman come to mind.
Debt collection:	Historically, owners do not pay bills unless subjected to heavy persuasion. Positive debt collection can conflict with good marketing skills.
Financial controller:	Budgets, forecasts, keeping bank managers happy and trying to cover excessive overheads are an everyday need.
Bloodstock historian:	The thoroughbred’s antecedents and potential must be known in detail (i.e. its progeny and form) by the trainer. Reference to any form of reference book can be seen as a weakness.
Fitness expert:	A total understanding of; equine fitness, build up, recovery and responses to pressure.
Handicap expert:	Total understanding of all handicaps and maximising benefits for the owners.
Choosing the right race:	Placing the horse and finding the ‘right race’ are a necessity. This requires a total understanding of the whole racing calendar by the trainer.
Motor vehicle buyer:	The business miles required of the average racehorse trainer can easily exceed a motivated sales representative. There is a need to combine speed with durability and the safety of livestock.
Geography:	The trainer must have a total knowledge of the location of all racecourses, combining visits to prospective owners, current and past owners.
Human resources:	Staff. Racing is labour intensive. The trainer probably needs the skills and expertise of a psychologist, team motivator, employment law specialist and, even on occasion, a marriage counsellor!
Bloodstock buyer:	Ability to have full ‘crystal ball’ facilities to buy right and be able to judge the right stamp. The trainer needs an ‘Alex Ferguson’ knack for introducing young raw talent.
Bloodstock seller:	Ability to always sell at a profit and at the right time, ideally foreseeing all future injuries.
Veterinary skills:	Many trainers would claim that they are expected to know more than a qualified vet but are unable to charge for this skill.
Catering supremo:	Owners expect full English breakfast after watching horses work and various forms of amazing entertaining all included in their standard training fees.
Post-race analyst:	Stating ‘he/she will win a race’ with confidence is not sufficient. Winning a race will be necessary. Each owner requires explanations, charm, drinks in the bar and positive observations on actual and future performance. This generally has to be conducted whilst saddling the next three runners or when the trainer arrives home wanting to collapse in peace and quiet.
24-hour chemist	One national newspaper is quoted as saying that trainers would all need chemists on a 24-hour shift to analyse all the ingredients that go to making a horse fit. They also state ‘one wonders how trainers can sleep at night’. The responsibility they must take for the welfare of their charges is constantly being undermined by developments beyond their control.

Larger trainers have more financial resources to provide the above infrastructure. Perhaps financial training and serious profit projections before commencing would be a positive direction as opposed to just introducing some lower quality races.

Survival of the small racehorse trainer

1.10

The tax treatment of a trainer is largely dependent on whether HMRC consider that the operation is run on a commercial basis as a trade, or as a hobby. As the distinction affects the availability of losses for offset against an individual’s other income, it is particularly relevant for the permit holder and the smaller trainer, who may be more likely to make losses.

Where HMRC regard racing as a hobby, any costs incurred by a trainer in connection with training a horse they own should not be deductible for tax purposes. On the same basis any trainer’s prize money received in relation to a horse he owns should not be taxable. It is, however, understood that some trainers do claim deductions for such costs and presumably tax any trainer’s prize money and in these circumstances it should be ensured that details of all horses owned by the trainer are fully disclosed to HMRC. This is important for both a permit holder training his own horses and the commercial trainer, many of whom buy a horse at a sale without a specific order from an owner and may subsequently be unable to sell all or part of the horse.

HMRC accept that where a trainer buys a horse without an order, he may claim the costs associated with the horse provided that it is clear that he is making genuine efforts to pass the horse on to an owner. The trainer should keep evidence of his efforts to sell the horse. Any HMRC enquiry will consider this point.

Horse ownership can be “tax free” (outside the scope
of tax)

1.11

The main taxation issue facing anyone involved in the racing of horses (and ownership of competition horses) is whether this constitutes a taxable activity (see 4.3). In order for an activity to be treated as a separate taxable trade, it must be managed on a commercial basis with a view to the realisation of profits. As far as racing is concerned, the majority of horses in training are not profitable as only a relatively small number win enough to cover the cost of their training. S30 ITTOIA 2005 specifically states that animals kept wholly or mainly for racing or other competitive purposes should not be treated as trading stock and thus the racing activity cannot constitute a taxable activity. In the main, the income and expenses incurred for the purposes of that activity should be confined to a separate racing account and be excluded from any tax calculation. There are limited exceptions to the rule that racing activities do not form part of a trade.

Following the principle in Sharkey v Wernher [1955] 36 TC 275 (see 3.21, 4.12, 6.11 and 7.13) horseracing, i.e. owning racehorses, is outside the scope of tax, i.e. not taxable. This is generally because HMRC regard the prospect of profit from racing to be so remote, it is not a taxable activity.

HMRC may attempt to combine the breeding and racing activities (see 7.14). The argument would be that the breeding of horses is a hobby and ancillary to the racing activities and therefore disallow the expenses of the breeding operation and to bring this outside the scope of tax. The profit from the sale of a successful racehorse to a stallion syndicate is potentially tax free (see 4.14) but how many profitable racehorses are there?

Background of the small breeder

1.12

The Thoroughbred Breeders Association’s (TBA) statistics show that the average member only has a few mares or, perhaps, part of one stallion (see 6.16). Most horses racing on the flat are fillies or colts that will have some life after they have finished their time on the racetrack. Some horses will retire to stud at their prime before there can be possible loss of value. The problem is that a breeder who does not occupy a stud farm may find it more difficult to convince HMRC that he is operating a bona-fide trade.

For most tax advisers the biggest possible impact on their client base is the entry into horse ownership and/or breeding by a client. This activity is often viewed by client and tax adviser alike as ‘tax free’ (see 1.11) and therefore irrelevant. However, it is suggested that all practitioners need to be fully aware of their client’s racing/equine interests, especially with regard to tax planning or during any future HMRC enquiry on their clients’ affairs generally. The whole question of late registration of a taxable ‘business’ is dealt with later in this book (chapter 3.13 below).

Stallions and broodmares

1.13

Stallions feature throughout this book as they integrate with every angle of tax planning. It is stallions which normally provide the greatest financial rewards for owners since they will generate fees for nominations, i.e. the right of owners to have their mares covered by the stallion. A stallion will normally cover at least forty mares in a season. For this reason, stallion syndicates are often established in which each syndicate member (usually a mare owner) owns one-fortieth interest, which gives the right to nominate at least one mare each year to the stallion.

Broodmares do not generate income until they produce progeny. Before they can do this they require a nomination, which can cost tens of thousands of pounds for the right to visit a successful stallion. This is a very high-risk investment, since there is no guarantee that the mare will conceive, and even when she does, it may take up to five years before the owner knows whether he has a profitable animal on his hands, or just an expensive pet! For progeny bred for national hunt racing this period may be even longer.

The thoroughbred and the non-thoroughbred

1.14

The UK thoroughbred horse is registered with Weatherbys. Only thoroughbreds can race. The term ‘bloodstock’ refers to the thoroughbred racehorse. Many tax cases, particularly those dealing with stud farming refer to the thoroughbred. The HMRC Internal Manuals on such subjects as agricultural property relief (APR) for inheritance tax (IHT) refer to horses as opposed to thoroughbred horses whereas the legislation does not. It is assumed that the tax principles relate to thoroughbred and non-thoroughbred equally, although again, each case must be tested on its own merits. This is looked at further throughout the book. The key objective is to always prove commerciality.

The equine business – the need for the business plan

1.15

It is well known that it can be difficult to be profitable with businesses involving horses. See cases Murray (TC03474) (see 3.20 and 8.11), Thorne (TC03851) (see 8.21) and McMorris (TC04204) (see 4.3). The quality end of industry is profitable, the bottom struggles. A business plan must be produced to prove profitability. The infrastructure costs are high, and areas of the sport are not as geared up commercially as they might be at a generic level. There are profits to be made from a well-run equine business. A livery, for example, must always try and control costs below livery charges; and a stud business must be able to sell stock above production costs.

An essential part of income tax protection is that every proposed equine enterprise has a business plan. There would be income tax losses (a stud has the first eleven years to produce a profit) and in order to protect this claim, there must be proof of commerciality. Dealing and ‘making’ of horses can be very profitable.

It has been said that there are three things certain in life – death, taxes and that on the question of commerciality, HMRC will always ask for the original business plan and how this is adjusted and reviewed as the business progresses. Income tax aside, equine businesses, apart from studs, also have to rely on BPR (business property relief) for inheritance tax relief (see 1.2 and 7.21) and therefore must be seen as a business carried on for a gain in line with s103(3) IHTA 1984. How can it ever be proven that an unprofitable business was to be of commercial design if there was no original business plan demonstrating this?

The importance of accounts and legal agreements

1.16

Should the equine accounts show too much investment activity, this must be flagged up in the same way as problems over legal ownership and protection. Professional advisers can help structure greater trading activity, while accountants and tax advisers can flag up the tax problems so that they can action improvements to trading. Both accountants and solicitors can flag up the lack of legal agreements. Working as a team means there is greater chance of maximising future IHT reliefs, and indeed, protecting all tax reliefs. Strong legal agreements will help protect against disputes and tax confusion.

The racing and breeding cycle

1.17

As the breeding cycle often involves a transfer of the yearling from the stud into racing, and its return to the stud after its racing career to produce bloodstock of its own, there is considerable merit in the view that that racing is actually an integral part of a stud farm’s activities and ought to be included as part of the taxable trading activity.

The racing activity can arguably be regarded as an essential part of the breeding process as a horse will need to be tested through its success in racing for its speed, stamina and courage in order to determine whether it is likely to have a successful breeding career. If a breeder’s racing activities were to be regarded as an integral part of his breeding trade, then the expenses of racing would be an allowable deduction for tax purposes and any winnings would be taxable.

In order for any activity to be treated as a taxable trade (see 8.2), it must be managed on a commercial basis with a view to the realisation of profits. As far as racing is concerned, the majority of horses are not profitable as only a small number win more than the cost of training. Chapter 3 deals with the ‘trade or hobby?’ problem in more detail.

Combining racing and breeding

1.18

In general, HMRC currently regards the prospect of profits from horse-racing to be too remote and so do not accept that it is a taxable trade. It is regarded as a hobby or recreational activity or, in the case of a company, a non-taxable activity. This means that the costs of training are not tax deductible but, conversely, any winnings and capital profit are tax-free. Nonetheless, there have been cases where the taxpayer (normally a company or a breeder who personally trains and races progeny) has been treated as carrying on a taxable activity but these have been extremely rare.

There is one other occasion when HMRC may attempt to combine the breeding and racing activities. This is when they consider the breeding of horses to be a hobby, and merely ancillary to the racing activity. In this situation, they would not allow relief for the breeding expenses since these expenses would be considered to have arisen from a non-taxable activity. Although the hobby breeder is not trading, the taxpayer may, in certain circumstances, still need to consider declaration of the occasional profit which he may make. HMRC does not need to establish that there is any continuity of trade in order to do so. If a hobby breeder achieves a very successful sale, there is a fair chance that he will be able to persuade HMRC that his losses from the past years should be taken into account, in which case, the amount of income tax payable will be reduced or eliminated. Again, the hobby element is looked at in chapter 3.

The tax adviser must encourage clients to notify them of large one-off profits so they can determine what correspondence with HMRC should take place. At 1.20 this subject extends to the breeding and owning of competition horses.

Trade or hobby

1.19

One of the major taxation issues facing the equine industry is whether HMRC consider it to be a commercial business and tax it as a trade rather than a hobby (see Chapter 3). If the business is considered to be a hobby, this will result in a denial of loss relief against other taxable profits if a loss arises but could still lead to a potential tax charge if the business becomes profitable. The VAT registration angle is considered at 5.4.

The breeder who occupies a stud farm (see Chapter 7), whether leased or owned, is more likely to be regarded as carrying on a trade and therefore taxed in the same way as a farmer breeding, for example, cattle or sheep. The starting point when considering the taxation of the bloodstock breeder is section 9, Income Tax (Trading and Other Income) Act 2005 (ITTOIA), which states that the profits of a farming trade will be taxed as trading income. Farming is defined for tax purposes as the occupation of land wholly or mainly for the purposes of husbandry. Husbandry includes “the breeding and rearing of horses in connection with those activities”. (see 7.1).

If the trade is treated as ‘farming’, then it will be covered by s9 ITTOIA 2005. Should the equine trade (for example dealing) not be held to be farming then it may be covered by s10 ITTOIA 2005. This sub-section gives further guidance on the way in which the trade will be taxed and states that if land is occupied for a purpose other than farming but is managed on a commercial basis with a view to the realisation of profits, the profits will also be taxed as trading income.

The equine breeder who does not occupy a stud farm may also be treated as if carrying on a bona fide trade under the general charging provisions of s5 ITTOIA 2005 but not ’farming’ for tax purposes.

Breeding v owning competition horses

1.20

If, in general, breeding horses is a taxable activity and racing (including ownership of competition horses) is a separate non-taxable activity then the transfer of horses from the stud to racing and from racing back to the stud will be accorded special tax treatment. This matter was considered in the 1995 case Sharkey v Wernher (36 TC 275) (see 1.11, 3.21, 4.12 and 6.11) and the principles from the case were later enacted by Finance Act 2008 Schedule 15 Part 1 which inserted the rules in ITTOIA 2005 Part 2, s172 A-F and CTA 2009 s156-161. The case established that a horse must be valued when it leaves the stud to go into training for racing (and competing). The market value of the horse at that time will determine the profit or loss realised by the stud from breeding and this will be reflected in the bloodstock accounts. Therefore, even though the horse has not been sold, any profit or loss from breeding is taxable or allowable when it leaves the stud to commence its racing career. Such profit or loss will have been realised ‘in kind’ rather than in cash so that tax will be payable on any profit even though the breeder will not yet have received any proceeds from the sale of the horse to meet the tax liability.

The whole issue of ‘owning’ horses for competition (racing, eventing, dressage, show jumping or polo) as opposed to a direct trading operation is looked at throughout the book and specifically in Chapter 4.

Livery yards in general

1.21

In the UK over the last few decades there has been a large increase in the number of livery/DIY yards for horses as a consequence of an expanding equine leisure industry. The recent need for agricultural diversification will probably increase the number of new livery yards even further. The legal and tax angles of livery yards feature throughout the book. With lockdowns and problems of travelling abroad during Covid-19 ironically the livery businesses have been thriving as UK recreation.

At present, all cat and dog boarding kennels have to be inspected and licensed by law as do riding schools, whilst livery yards currently fall outside the licensing requirements. There is no control over the standards of care offered or the experience of the staff in charge of these yards.

It is of concern to British Equine Veterinary Association (BEVA) that if there is no registration system for livery yards and no control over the standards of care then the ability to maintain proper disease control within the horse population in the UK is inadequate.

The tax position and planning around livery yards is looked at in 1.7 with regard to Vigne and the VAT position is looked at in 5.21.

Employing family members in the equine industry

1.22

The world of equestrianism is forever growing and following closely in the footsteps of their successful parents are the offspring of livery yard owners, trainers and profitable competitors from a contrasting array of equine disciplines. It can be a smart move to employ family members, particularly the younger generation, within an equine business due to the added security and trust one would have with their own son or daughter, as well as the potential for tax savings on reduced profits.

However, being a member of the family does not eliminate any employment laws or bypass the minimum wage requirements. The worker must be at least 14 years of age and fulfil a role that is required by the business. If the family member is to be employed the employer must register with HMRC and make provisions for the correct reporting of PAYE and National Insurance liabilities. There are certain situations whereby if the individual is employed only part time (a Student in the summer holidays for example) and certain other criteria are met, the employer may be able to apply for special rules which negate the need to register as an employer with HMRC.

Often family members and children are paid a sum just below the Primary and Secondary Threshold for National Insurance contributions (set at £184 per week for 2021/22) but above the Lower Earnings Limit (£120 per week for 2021/22) to enable the employee to gain the benefits of National Insurance contributions, such as contributing years toward their state pension, without either the employee or employer becoming liable for National Insurance contributions on the wages. The wages must also be paid on a ‘Real Time’ compliant basis.

Real time information, most commonly known as RTI, is a reporting requirement designed to make pay as you earn (PAYE) submissions more efficient. It requires an employer to make an electronic submission to HMRC every time a payment is made to an employee in order to provide HMRC with wages information in ‘real time’, enabling an up to date record to be kept by HMRC which can be viewed by the employee at any time. There are a number of different software services available to make RTI submissions through, the most cost effective at the time of writing being HMRC’s Basic PAYE Tools which is free for businesses with up to ten employees.

There are some key points to be aware of before setting up a PAYE scheme and paying a family member through RTI in the equine business;

1. Employees must be paid at least the national minimum wage or the agricultural minimum wage where applicable.

2. Employees will be entitled to sick pay, holiday pay and all other statutory payments.

3. Depending on the employee’s salary and age, they may be required to be entered into a work place pension scheme as a result of auto enrolment.

It is certainly worth considering the above points to avoid unnecessarily burdening yourself with extra administration or payroll costs.

As mentioned above, payments to family members must be within the guidelines of the minimum wages applicable but equally must be comparable with commercial rates and akin to a wage any other person could expect to achieve for performing the same tasks. For example, it may prove somewhat difficult to justify to HMRC why your 18 year-old daughter was paid £40 per hour to muck out and bring in horses, conversely, if she had designed you an outstanding website this may be another story.

Amongst the most important points to consider is that the family member must actually be working in order for the total amount of their wages to be valid in their use as a business deduction for taxation purposes. The payments cannot be a ‘disguise’ as pocket money paid to the business owners’ children. All payments must meet the ‘wholly and exclusively’ test, meaning there must be no duality of purpose to any payments made to the family member, as with any other member of staff.

There are a lot of tangible tasks that can be carried out by family members as part of an equine trade, but as always payments must be made in a compliant and disciplined manner with strong documentation to support them which must be based on fact and evidence.

This was put to test in the case of Alan Nicholson v HMRC (2018) TC06293. In Alan Nicholson v HMRC, the tribunal disallowed a sole trader’s payments made as wages to his son whilst at university, concluding that the expenditure was not wholly and exclusively incurred in the interest of the trade being carried out by the father. See 5.4 for business expenses and VAT.

The First-Tier tribunal (FTT) found that the self-employed taxpayer could not deduct the ‘wages’ he paid to his son as an expense against his self-employment income, as there was a dual purpose to the payments. It was considered that the taxpayer was helping to support his son at university and there was no methodology or keeping of records in relation to hours worked or payments made.

The point at issue was whether or not an amount of £7,400 claimed to be wages paid to the taxpayer’s son, was incurred wholly and exclusively for the purpose of the taxpayer’s trade, and hence deductible against his self-employment income.

Many family members are employed in the family equestrian business in very genuine conditions. However, it is of upmost importance for accurate records to be kept of all duties carried out by the family member, as with any employee, to defend an attack by HMRC.

It is contended, in the case of Alan Nicholson, that the payments made were of dual purpose. They were “natural parental love and affection” and/or ‘personal benefit’ purposes rather than solely a business purpose. As a dual-purpose expense, the payments made to the son of the appellant failed to meet the legal conditions of s. 34 TMA and therefore were not deductible from his self-employed income. See 7.15 for equine competition expenses for business purposes.

The FTT noted, howbeit, that it is likely that the expense would have met the wholly and exclusively test if he had paid his son on a more time recorded basis or had there been some form of methodology in calculating the amount payable and an accurate record maintained of the number of hours his son worked.

The wages claimed were based on 15 hours per week at £10 per hour for the “promotion of the business through internet and leaflet distribution and computer work” which the son carried out whilst at university. However, there was no evidence to support these actions. The wages were paid partly in cash (a bank statement evidenced payment of £1,850) and partly in food and drink, which the taxpayer paid for whilst visiting his son and paying for his weekly shop.

Details that the equine industry can take from this case are the upmost need for accurate keeping of records of labour and services provided by family members, being just as important (perhaps even more so) as with any other employee. Details of hours worked should be kept along with the duties carried out as well as a structured way of calculating the employee’s pay in line with their terms of employment. The wages owed should then be made payable as cleanly as possible to the employee to avoid any blurring of the lines between the employer and employee, a payment in full via bank transfer would be the preferred way of doing so to enable clear reconciliation for the business accounts.

If an accurate and methodical approach is taken to the employment and calculation of a family member’s salary, along with evidence of the work carried out, the conditions of Section 34 (1) TMA 1970 will be adhered to and therefore the wages deductible as expenses from the business or trade. See Chapter 4 for more details on allowable expenses within horse ownership. For specific advertising expenses see 3.14 detailing HMRC’s BIMs on Advertising Expenses: Sponsorship.

Equine industries lend themselves to family employment. If the equine business is considering employing a relative, there are five simple steps which if in place will make it very difficult for HMRC to challenge any payments made:

1. Make a simple agreement with the employee covering as a minimum; the duties to be performed, the hours to be worked, the rate of pay and how they will be paid.

2. Keep evidence of the work they have performed, along with timesheets to assist in the calculation of wages due.

3. Pay your relative in full directly into their bank account to avoid ‘payments in kind’.

4. The wages must also be paid on a real time compliance basis.

5. Keep a payroll record, contemporaneous with other business records.

Polo

1.23

Polo has been a growth industry. It has benefited from exceptionally good marketing and PR aimed at the ‘glamour’ market, not necessarily just those traditionally involved in equine pursuits themselves. Many supporters and participants might be categorised as those who attend Royal Ascot – they enjoy the glamour, the clamour and the entertaining.

As a result of this, the leading polo organisations seem to have attracted excellent sponsorship deals (see 3.15) and have television coverage of all the big games on the leading television sports channel.

The sport has also concentrated on its grass roots, i.e. encouraging a revival of pony club polo for several decades and a big interest in club level polo, encouraging courses for beginners and a significant social element to activities.

Every player has a handicap starting at –2 and going up to 10. Generally, most of the players rated 10 originate from Argentina, whilst there are many UK professionals with handicaps of only 3 or 4 goals. The handicap system works so that when two teams of four line up against each other, the handicaps of each player in each team are added together so that the teams can be balanced by the aggregate handicap of the whole team.

There are expressions such as ‘low goal’ and ‘high goal’ polo and this is based on the aggregate handicaps of the teams. A low goal team is one which by definition has a relatively low goal handicap. A new professional polo player with a low goal rating can be very attractive to a team wishing to keep their handicap down.

The polo industry creates a large number of businesses and associated tax problems and need for planning. There has been a trend for polo clubs to be owned by individuals with a passion for polo but sometimes coming from very commercial backgrounds and who operate these activities in a very commercial manner. There are a number of polo schools which offer tuition (see 5.22) for people wanting to be introduced into the game of polo and there are a number of polo livery yards which will keep polo ponies for their customers. Many of these polo livery yards will also buy and sell polo ponies, as well as hire polo ponies for those players who do not want the all-year round responsibility, but nevertheless enjoy the game. This can also be very useful for those who have injured ponies etc.

In order for the UK professional polo player to survive, it has been said that they ‘need a very large trust fund income’. However, there are those who can make a living from the sport and in addition to appearance fees and fees for playing certain teams, they generally support their income through buying and selling polo ponies and also ‘making’ a polo pony which will often involve re-training, for example, a small failed racehorse or breeding their own polo ponies which in turn leaves them operating stud farms. It is often the dealing side that can produce the largest contribution to profit.

A lot of the stud farms that produce polo ponies are based in Argentina, Ireland and other countries but there has recently been a growth of the UK polo pony stud. Tax planning in relation to these activities is covered in chapter 7: tax planning for stud farms. In the UK polo is a summer game and in the winter the horses are grazed at grass liveries. In this context it is worth considering the recent case of Gill (see 2.9).

Show jumping

1.24

Show jumping in the UK has seen a meteoric rise over the last decade and more. Horses used in show jumping have been sold for more than £1 million on a regular basis. The “golden glow” of the 2012 London Olympics has been a positive.

At grass roots this remains a buoyant industry. Everyone who learns to ride wants to progress by trotting over a coloured pole and then jumping multiple coloured poles and then entering a show jumping class at the local show and enthusiasm for this does not seem to have diminished in any way.

As the standard of show jumping improves so the cost of an experienced show jumper increases dramatically and, despite relatively small prize money, the horses command very high prices. Many tax advisers see this as merely a way for their successful clients to indulge the interests of their sons and daughters, but there are still some very important tax and commercial angles which ought to be considered.

In particular, there are important questions to be considered regarding the tax status of sponsorship payments, competition yards and the boundary line between a commercial business and a hobby (see chapter 3). There are also a large number of professional show jumpers who buy and sell horses (see 5.11 for details on the margin scheme) to support their profession and also give freelance instruction (see 5.22).

The European and world show jumping scene has been particularly commercial and strong with huge development at every level, especially with high prices being achieved for quality horses. Many famous names have entered the sport which has pushed up horse prices and the glamour image in equal proportions. Sales to daughters of ‘super-rich’ popstars and Russian billionaires post London 2012 have broken previous records set for sales of show jumping horses, further increasing the sport’s image and popularity.

Eventing

1.25

The eventing industry can probably be seen as possibly the least commercial of all equestrian disciplines. Competitors require all three skills of dressage, show jumping and cross country. They need to possess boldness to ride cross country, technical competence to perform dressage and superior technical riding skills and judgement for show jumping. Likewise, the horse needs to have all these skills. A good eventing horse commands a considerable price premium in the same way that a good polo pony or show jumper does. Eventing still achieves some television coverage at Badminton and Burghley Horse Trials and the attendance figures for spectators at three-day events, such as Badminton, Blenheim or Gatcombe, remain very strong. Eventing also provides a commercial outlet for a large number of other related businesses such as equine clothing retailers and refreshment providers.

Eventing does not have the benefit of the glamour and, therefore, does not attract the valuable sponsorship deals seen in polo or the horse racing world. As a result, it is extremely difficult for a professional ‘eventer’ to survive commercially and again they frequently have to involve themselves in other equestrian activities, such as developing and selling young event horses in addition to giving instruction and trying to attract suitable sponsorship deals. The industry does, however, have a commercial infrastructure with successful eventing yards, and freelance eventing instructors etc.

Dressage

1.26

The dressage industry is another area of growth and, like polo, attracts glamour and potential sponsorship (see 3.15). It is, perhaps, rather cynically perceived by the outside world as just a beautiful and elegant way to spend a lot of money on a hobby activity. However, there are some core elements of commerciality with top horses being sold for large sums. There are strong commercial aspects involved in being able to either breed or produce a top dressage horse and success in the competitive world of dressage goes hand in hand with this.

As a result, there are studs which focus purely on breeding dressage horses and there are some studs which breed horses for the dual disciplines of, say, dressage or eventing or show jumping. There are a relatively large number of good freelance dressage instructors, there are dressage livery yards and the sport has a very dedicated and committed support structure.

Point to Point

1.27

The Point to Point industry is amateur racing which runs from November to June annually and is another very thriving and popular sport. All the riders have to be amateur jockeys, although they can earn their living from other equestrian pursuits (there was a time when they had to be entirely amateur) and each Point to Point is, in the main, run by a local hunt.

Each Point to Point horse has to have been fairly and regularly hunted with a local pack of hounds (which does include blood hounds and drag hounds). Prize money is very small whilst enthusiasm levels can be exceptionally large.

The sport includes a large number of activities, not only fund raising for local hunts but offering a second chance for retired racehorses that are perhaps no longer good enough to support full training fees in a proper training yard, but can provide a keen amateur with a lot of fun. Point to Point also offers an alternative for young racehorses to race without too much financial outlay. There have been many successful Cheltenham Gold Cup or Grand National winners who have originated from the world of Point to Pointing.

Those who own and ride Point to Pointers find it an exceptionally enjoyable and thrilling way to spend their hard-earned money. When compared to keeping a racehorse in training or some of the other equestrian disciplines, it is also relatively cost effective.

However, point to pointing has been hard hit by COVID and racing has survived very well. The result is that at the time of writing there has been a large swing away from running horses in point to points towards the larger prize money and overall support of mainstream racing. The next 2021 / 2022 season will be interesting to see the long-term impact.

Point to Point also attracts a large number of spectators and, within its structure, it supports a large number of equine businesses, such as point to point livery yards (which often double as hunter livery yards) and small training yards.

Point to Point horses can cost only around £2,000 to £5,000 to purchase. A good place to purchase potential Point to Pointers will be Ascot bloodstock sales or direct from the trainers. The jump trainers who love their racehorses and want to see them going to good homes are very keen to try and sell them to a good Point to Point yard for relatively small sums, which they could probably justify under the heading ‘equine welfare’ rather than ‘commercial reality’.

Business sponsorship and racing

1.28

Sponsorship is looked at in more detail in Chapter 3.

Horse racing is a high-profile sport and one of the most televised. Many companies are using racing to promote their products through advertising and sponsorship. It is important to consider the tax treatment of expenses incurred in connection with racing by businesses which do not operate a racing or breeding trade. Common examples of such expenditure include owning and running a racehorse, sponsorship and advertising. There is no doubt that racing has proved to be a very successful marketing tool for a number of businesses. The key is being able to provide the detail and evidence marketing success to HMRC.

Successfully claiming a deduction for racing expenditure will be more difficult when the owners/managers of the business themselves have a known interest in racing, particularly where the company is a private company. HMRC will probably seek to argue that the expenditure has been incurred because of the personal interest of the owners rather than for the benefit of the trade.

The general rule for deductibility of expenses is in s54 CTA 2009 and s34 ITTOIA 2005. These sections state that expenditure will be deductible if it is wholly and exclusively incurred for the benefit of the trade of the business. Therefore, in general, a business will be able to obtain tax relief for racing expenses, and conversely will be taxed on any race winnings, where it can satisfy HMRC that the expenditure is incurred to promote the trade, for example by increasing awareness of its location, products and brands. Advertising and sponsorship may satisfy this criterion. When HMRC question the tax allowability of the expenditure, the business should be able to support all the arguments with evidence and statistics (see 3.17).

There is the risk that there may be a taxable benefit on the employee or owner where HMRC regard the business’s racing expenditure as a perk for that person. This is particularly likely to be the case where the business in question is a close company as defined by s439 CTA 2010 – that is, very broadly, where five or fewer persons control the company – where it is more likely that a director shareholder will be able to influence the spending of the company. BIM 42555: “sponsorship is often a form of advertising. A business tries to obtain benefits for its products, goodwill or reputation and public image by association with a popular or successful event or person” (see 3.18).

Racing club

1.29

Increasingly the ownership of racehorses is open to a wider group of people through the establishment of racing clubs, where individuals pay a subscription for a share in horses owned by the club and usually for hospitality at the racecourse when the club’s horses are running. Many trainers are now starting their own clubs as a means of introducing people to the experience of owning a racehorse.

A racing club organised by a trainer may be regarded as a separate trade but there is the possibility that HMRC might seek to challenge the tax deduction of the provision of hospitality for the club members on the grounds that this represents entertaining potential and existing clients. The possibility of an HMRC challenge would be reduced if the members of the club paid a specific charge for the provision of hospitality rather than this being included in their annual subscription.

Bloodstock agents

1.30

The industry of the purchase and sale of horses is vibrant in the UK. The VAT position is considered at 5.27. There is currently a large increase in agents working in the commercial areas of show jumping, polo, eventing and dressage.

Conclusion

The equine industry is energetic and the opportunities and passions to succeed are strong. There is a fine line between the hobby operation and the commercial business and it is therefore essential that there is a business plan for all diverse choices. The difference between commercial ownership and the trade must be defined. There must be robust evidence of the commercial operation. The choice of business structure needs careful review and planning. With HMRC’s attacks on the DIY livery yard as an investment and haymaking for horses not seen as an agricultural activity there must be a full understanding of the industry and the specific operation. With the variety of different interests, e.g. racing, competition, hacking and tourism, each operation must be looked at on a case-by-case basis.

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