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BLOODSTOCK TAXATION GUIDE

THE HORSEMEN’S GROUP

THE HORSEMEN’S GROUP

Produced by The Thoroughbred Breeders' Association Bloodstock Taxation Group August 2014

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Foreword

Welcome to the updated edition of the Bloodstock Taxation Guide published on behalf of the Horsemen’s Group and available in soft copy on both the Horsemen’s Group and TBA members website. It is an indication of the changing face of the UK bloodstock industry that the Horsemen’s Group are the third different organisation to be associated with the Guide after the Horseracing Advisory Council and the British Horseracing Board. However, taxation remains an important issue for all participants in the industry. It is a measure of the pace of change in taxation matters that the gap between editions of the Taxation Guide continues to reduce. Producing a soft copy guide will enable us to keep the material up to date as will the use of direct links to the HM Revenue & Customs website. The Guide is primarily focussed on the breeding and owning of racehorses but we have also included sections of specific interest to trainers and jockeys. We are grateful for the efforts of the National Trainers Federation – in particular Rupert Arnold and his team – and the taxation advisors to the Professional Jockeys Association of Great Britain (Bob Fidler of Griffins) in preparing and checking those sections, and for allowing them to be included in this Guide. Any questions regarding the content of these sections should be directed in the first instance to the authors. As before, the main purpose of the Guide is to provide a general outline of the major direct tax and VAT issues to be considered by those working in the industry and their professional advisors. The Guide is not intended to provide a definitive answer to every tax query that may arise and the advice of a qualified practitioner should always be sought before acting on the information in the Guide. As indicated above, we have had to deal with a large number of changes and I am indebted to my fellow members of the Thoroughbred Breeders’ Association Bloodstock Taxation Group for their efforts in producing the Guide. Thank you therefore to Terry Dockley, Philip Freedman, Chris Kennard, Penelope Lang, Robin Platt and Louise Kemble. Of course even with all the hard work put in by the members of the Group their contributions still need to be converted into the finished product. This has been done with skill, patience and understanding by Shelley Oxford of Smith & Williamson LLP. I hope you find the Guide useful. Peter Mendham Chairman, Thoroughbred Breeders’ Association Taxation Group www.thehorsemensgroup.com www.thetba.co.uk www.racehorsetrainers.org www.hmrc.gov.uk www.weatherbys.co.uk www.griffins.co.uk www.smith.williamson.co.uk www.terrydockley.co.uk www.agmpartners.com www.jamescowper.co.uk www.morleyco.co.uk www.shadwellstud.co.uk

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BLOODSTOCK TAXATION GUIDE

Part 1

DIRECT TAX ISSUES

Contents 1 Bloodstock Breeding ........................................................................................................................... 5

2 Stallions and Syndicates ................................................................................................................... 10

3 Racing .............................................................................................................................................. 14

4 Trainers............................................................................................................................................. 19

5 Employee Issues ............................................................................................................................... 22

6 General Direct Tax Issues ................................................................................................................. 30

7 General Anti-Abuse Rule (GAAR) – Important New Legislation ........................................................ 39

8 Inheritance Tax and Loans ................................................................................................................ 40

9 The New ATED ‘Mansion Tax’ .......................................................................................................... 42

APPENDIX I: Capital Allowances ............................................................................................................. 43

APPENDIX II: Inheritance tax – General (IHT) ......................................................................................... 49

APPENDIX III: Overseas Taxation – Statutory Residence and Dual Residence ....................................... 51

APPENDIX IV: Breeding and Commerciality ............................................................................................ 63

Appendix V: HMRC Business Income Manual “Guidance on Sponsorship” .............................................. 68

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Part 2 – Value Added Tax (VAT) – see separate document Part 3 – NTF Guidelines to Trainers – see separate document

(The Tax Treatment of Living Accommodation for Stable Staff)

Part 4 – PJA Jockeys Tax and VAT Booklet – see separate document

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PART 1 – DIRECT TAX ISSUES

1 Bloodstock Breeding

1.1 Basic Principles

Income Taxes, National Insurance and Corporation Taxes are collected by H M Revenue & Customs (HMRC). Bloodstock breeders fall into one of two broad categories for tax purposes: breeders who own horses and own or lease a stud farm; and those who own horses but keep them at a public stud or livery yard. One of the major taxation issues facing the breeder, in common with many in the bloodstock industry, is whether HMRC consider it to be a commercial business and tax it as a trade rather than a hobby. If the business is considered as a hobby, this will result in a denial of relief against other taxable profits if a loss arises but could still lead to a potential tax charge if the business becomes profitable. The factors which will be considered by HMRC in determining whether a trade is being carried on are considered in detail in Appendix IV. It should be noted that the factors which will be considered are the same whether the breeder is carrying on a large or small operation. The breeder who occupies a stud farm, 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’. If the trade is treated as “farming”, then it will be covered by Section 9 ITTOIA 2005. Should the bloodstock trade (for example pinhooking) not be held to be farming then it may be covered by Section 10 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 treatment for tax is the same regardless of whether the breeding trade is covered by Section 9 or 10. The bloodstock 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 Section 5 ITTOIA 2005. However, it may be more difficult for such a breeder to convince the Inspector of Taxes that this is, in fact, the case. Once it is established that a breeder is carrying on a trade, it is necessary to calculate the profits on which he should be taxed. Accounts will be prepared as for any trader, taking credit for horses sold or transferred to racing. Deduction is then made for the cost of sales and other overhead expenses.

It is not uncommon for stud farmers to incorporate other types of farming, and horse racing, within

their accounts. Horse racing is not generally regarded as a taxable activity and therefore the profits

and losses of a business that includes both breeding and racing have to be split so that any

profits/losses relating to the racing element are eliminated from the taxable result. In exceptional

circumstances where racing can be demonstrated to be a necessity to proving the worth of the

breeding stock, it may be possible to argue that the two activities constitute one trade or that, at least,

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some of the costs of racing should be allowed as a deduction for tax purposes. This is discussed

further in Part 1 Chapter 3.

There are some specific points worth noting in connection with stud farm accounts.

1.2 Transfers To and From the Stud

If, in general, breeding horses is a taxable activity and racing 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 1955 case Sharkey v Wernher (36TC275) 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, Section 172 A-F and CTA 2009 Sections 156-161. The case established that a horse must be valued when it leaves the stud to go into training for racing. 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. When the horse returns to the stud it is brought into the bloodstock accounts at its current market value. To use an extreme example, if a horse left the stud at a value of say £500,000, became an extremely successful racehorse and returned to the stud at a value of £3m, the increase in value of £2.5m during its racing career will have accrued tax-free to the owner. Conversely if the horse is worth less when it returns to the stud then a non-allowable loss will have accrued.

1.3 Valuation of Stock – Cost or Market Value

Generally, horses treated as stock are to be included in the accounts individually at the lower of cost and market value (see HMRC Business Income Manual 55710), with the valuation being made at each year end. Mares will usually have been either purchased or transferred from training, although it is not uncommon for them to go to stud without having been raced. Horses purchased will be brought in at cost, while those transferred from training will be brought in at the market value on the date of the transfer. Where a horse has been bred and reared by the breeder and never raced, it should be brought in at the cost of rearing and keeping the horse. The accounts will reflect these amounts in stock unless the current market value of the animal is lower, in which case this lower value will be substituted. A number of factors will influence the market value of a horse and these include its pedigree, the performance of its relatives, its racing career, market conditions and breeding prospects. The net movement in the value of stock is included in the profit and loss account and hence stock values can significantly affect the taxation position. HMRC therefore tend to examine such values in detail and it will often be worth seeking a written independent valuation in certain cases. There is a specialist bloodstock section in the Shares and Assets Valuation Division of HMRC (see Business Income Manual 55705). Requests for advice should include:

The name of the horse to be valued

The valuation dates

Any opinion of the open market value together with the reasoning behind the valuation

When considering the valuation of foals and yearlings, the following points are relevant:

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Foals At birth the following costs are normally transferred to stock in respect of the foal: a) Nomination fee b) Maintenance costs of the mare for the previous year Because of the inherent uncertainty that a foal of any value will be produced, some of these costs will have been included as a deduction in the previous period’s accounts. The costs of a foal are increased by its cost of keep from the date of weaning until sale or transfer into training. This also applies to foals purchased, from the date of purchase. Depreciation Business Income Manual 55710 states that HMRC accept that stallions can be depreciated in certain circumstances, but that this treatment is not generally accepted for mares. Stallions can be depreciated on a straight line basis until they are 10. However, if their market value is higher, depreciation is not appropriate. Mares are always valued at the lower of cost and net realizable value. Stud Fees Paid The stud fee or nomination fee should be reflected in the business balance sheet unless the mare has already given birth to the foal, or has not conceived or has aborted the foal by the accounting date or an “adjusting event” occurs. This adjusting event might be for example that a defect is found in the foal between the balance sheet date and the date the accounts are finalised which means the foal becomes of no value. One of the following methods needs to be used to reflect the nomination fee in the balance sheet:

Include the fee in a stock valuation of the embryo or foetus of the foal

Increase the value of the mare while she is carrying the foal by the amount of the fee

Carrying forward the fee as a prepayment There is a current rule of thumb basis of £75 per week for the valuation of the maintenance costs of a foal, which has been agreed between the TBA and HMRC. However, in practice, alternative bases can be used, provided that they are appropriate to the circumstances and can be supported by documentary evidence, for example, invoices for keep. Yearlings As with foals their cost is increased by the expenses incurred in their maintenance until they are sold or transferred into training. The valuation of stallions and stallion shares is dealt with in Chapter 2.

1.4 Valuation of Stock – The Herd Basis

As an alternative to the treatments set out above, where horses are kept for breeding, the owner may elect for them to be treated as a single herd, that is, as a capital asset in accordance with Section 111 ITTOIA 2005. However the herd basis is not normally recommended for horses and indeed Business Income Manual 55720 notes that such elections are unusual for horses.

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1.5 Capital Allowances

The cost of the land used for stud purposes does not give rise to a trading deduction for bloodstock breeders. A breeder may however qualify for tax deductions on subsequent qualifying expenditure on assets used in the business. These deductions, known as capital allowances are outlined in greater detail in Appendix I to this Part. Please note that there have been changes in the way capital allowances are claimed on the purchase of a property (land and buildings) and it is important that all advisers take capital allowances into account before finalising the purchase as failure to do so could result in allowances being lost. This is covered in Appendix I to this Part.

1.6 The Use of Tax Losses

As previously indicated, losses from a commercial breeding trade are generally allowable for tax purposes while losses from racing are not - unless exceptionally there is a case for the racing to be treated as an extension of the breeding operation. Where applicable, breeders trading as individuals are able to set the loss from breeding for the tax year (fiscal basis) against other income for that year or, if this is insufficient, against the income of the previous tax year. If the breeder pays tax on their other income at the 2013-14 marginal rate of 45% then the net cost of the breeding loss to him is only 55% after tax relief. Please note that up to 5 April 2013 the marginal rate was 50%. If there is insufficient income in the current year or the previous year to use up the losses, or no claim is made, the losses can be carried forward and set against profits from the same trade, without time limit. In the first four years of a trade breeding losses can be carried back and set against the income of the trader of the previous three years. There is a restriction to the amount of losses that “non-active partners” or sole traders can set against their other income in a particular tax year. Section 103C Income Tax Act (ITA) 2007 set a £25,000 cap on the loss relief that could be claimed, with a non-active partner or sole trader defined as one spending an average of less than ten hours a week personally engaged in the activities of the trade. S74 ITA 2007 extended the loss restriction to non-active sole traders as well as partners.

1.7 Additional Loss Relief Restrictions

Legislation contained in the Finance Bill 2013 creates a restriction on the level of income tax reliefs for certain tax deductions where previously there was no cap on the amount of relief that can be claimed. The maximum tax relief that can be claimed will be restricted to the higher of £50,000 or 25% of an individual’s income as calculated under the relevant tax provisions. This applies with effect from 6 April 2013. The reliefs affected which are likely to be relevant to stud farms are as follows:

Trade loss relief against general income

Early trade loss relief

Post cessation loss relief

Property loss relief against general income arising from capital allowances or agricultural expenses

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Post cessation property loss relief

Qualifying loan interest on certain loans (loans to buy an interest in a company or a partnership and loans taken out by personal representatives to pay inheritance tax)

It should be noted that although the cap applies from 6 April 2013 if losses arise in 2013-2014 and the losses are carried back to the prior year, HMRC will apply the cap to the 2012-2013 year as well. Thus the new rules apply to all losses arising after 6 April 2013. In addition, since the calculation of 25% of an individual’s income is based on their income minus any pension contributions, pension contributions may waste the ability to optimise use of loss reliefs. Please note that gift aid payments to charity are not deducted in calculating the level of income to which the 25% cap applies.

1.8 General Loss Considerations

A company carrying on a trade of breeding can claim relief for the loss from breeding against its other income in the period or can carry back the loss against the profits of the preceding period (if the breeding trade was carried on during that period). Alternatively, if the company is part of a group or consortium, the loss can be passed on and set against the profits of the same period of another group or consortium company. As with an individual, any unused losses can be carried forward and used against future profits of the same trade without time limit. If an individual or company is carrying back losses to a prior period or a company is passing on losses to another group company, a claim must be made to HMRC. Claims must be made within twelve months from 31 January following the end of the relevant tax year (for individuals) or two years from the end of the relevant accounting period (for companies). No claims are needed where losses are carried forward. As losses from farming and breeding often continue for a number of years, specific legislation was brought in to restrict relief for losses in these circumstances. This is found in Section 67 ITA 2007 which states that if a tax loss (before taking into account capital allowances) from farming has been made for the past five fiscal years the above-mentioned reliefs against income in the current or prior periods shall not be available for losses sustained in any future year. Sub-section 3 provides something of an escape: where at the end of a tax year a ‘competent person’ would reasonably expect to make profits in the future, but could not at the start of the loss-making period reasonably have expected to make profits before then, loss relief will not be restricted. In practice, HMRC accept that bloodstock breeding is a more long-term activity than farming and extend the five year period to up to eleven years from the commencement of the trade (concession since 1982 following HMRC and TBA meeting). If a profit is then made losses can be made for a further five years before the provisions of Section 67 ITA 2007 may again apply. On the other hand, HMRC may decide to review the case if losses continue to be made. If, in doing so, HMRC consider that the activity has not been carried on commercially from the outset, they may attempt to deny tax relief for the losses of past years and raise assessments to recover any tax due as a result. The trade has to have the potential to be profitable in the future and evidence of this potential (for example business plans) needs to be maintained in order to defend any argument by HMRC that it is non-commercial.

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2 Stallions and Syndicates

2.1 Introduction

As mentioned earlier, bloodstock is a high risk, long-term business. Mares do not generate income until their progeny are sold, a period of at least 18 months; meanwhile the owner must pay for their upkeep, together with the nomination fees. As a result losses are likely to be made in the early years. Stallions on the other hand produce income sooner, normally within a year of returning to stand at stud. The initial value of the stallion will depend on its success during its racing career as well as its pedigree and a stallion can be an extremely profitable asset from the outset, particularly where the stallion has a large book of mares. The owner of a successful colt has a number of choices at the end of its racing career. It can be sold and, as the racing activity is not normally taxable, the proceeds will be received tax-free. Alternatively, the stallion can be retired to stud where it will enter the accounts at its market value on retirement, so that if it is sold by the stud at a later date, any increase in its value during its racing career, but not thereafter, would be tax-free. The stallion will generate income indirectly by covering mares belonging to the owner and directly through the sale of nominations to other breeders. This income can be generated in both the Northern and Southern Hemispheres, i.e. during two breeding seasons in one year. A stallion’s value on retirement from racing is determined by its future earning potential. A stallion which from the outset, stands in both Northern and Southern Hemispheres will therefore have a higher value than if it was restricted to one Hemisphere. As the future value of the stallion and its income producing life is uncertain, the owner may prefer to realise capital and still receive an element of future taxable income through nomination fees, as well as retaining the right to send his mares to the stallion. This can be achieved by selling the stallion to a syndicate of which the original owner is a member. However, more commonly in the past few years, an owner has sold a majority stake to a major stallion stud, either retaining a small minority share or simply a number of non-transferable annual breeding rights.

2.2 Valuation of Stallions as Stock

HMRC Business Income Manual 55710 specifically addresses the value on which stallions should be included in the accounts. As discussed in section 1.3 above, horses treated as stock should be included in the accounts individually at the lower of cost and net realisable value. However, as far as stallions are concerned HMRC generally accept a rule of thumb method of valuation where they allow the cost of a stallion to be written off in equal instalments until the stallion reaches the age of 10, with the write off being included in each year’s profit and loss account. The aim of this method is to give an acceptable approximation to the net realisable value of the stallion. The method is not appropriate in the following circumstances:

where the actual value of the horse is known at the balance sheet date; or

where it gives an obviously unreasonable result, for example where the value of the stallion has increased, or fallen at a significantly different rate than under the rule of thumb method.

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2.3 Establishment of Syndicates

Traditionally syndicates were formed with forty members, forty being what was felt to be the optimum number of mares that a stallion could cover during the breeding season without being subjected to undue strain. Stallions today often cover many more than 100 mares, and recent syndications have reflected this. As each syndicate share normally entitles the owner to only one nomination there will usually be a significant number of surplus nominations available for sale. One or two may be required to cover the syndicate costs, but most will give rise to extra income for the members of the syndicate. The tax treatment of both the proceeds from the sale of nominations and the sale of syndicate shares is considered below.

2.4 Taxation of Syndicates

Traditionally a syndicate has itself been taxed on the income from the sale of surplus nominations as an unincorporated association. However, a fairer reflection of the role of the syndicate is to treat the syndicate as a fiscally transparent entity with the income being taxed on the syndicate members in the appropriate proportions. It is likely to be easier to justify the transparent treatment where either the syndicate operates as a Limited Liability Partnership or all syndicate members are involved in the syndicate management. Both treatments are discussed below. The legislation to be introduced in the Finance Act 2014 should also be considered.

2.5 Syndicates as Unincorporated Associations

Where a syndicate is taxed as an unincorporated association it is taxed as if it were a company. This is based on the principle that syndicates represent a pooling of economic interests under the control of a syndicate manager and committee, which have the power to accumulate or distribute any surplus income. In other words, it is similar to shareholders owning a stake in a company managed by a Board of Directors. The technical support for this view is not beyond question. The tax treatment in such circumstances is as follows:

2.5.1 Purchase of Shares

The share in the stallion syndicate will be treated as stock and valued each year at the lower of cost and net realisable value, with any write down in value being allowed as a deduction in calculating trading profits. As set out in 2.2, HMRC normally accept a rule of thumb method for valuing a share: the cost of the share is written off by equal annual instalments until the stallion reaches the age of ten.

2.5.2 Sale of Shares

The net proceeds of sale will be treated as trading income, with a deduction being given for the written down value of the share at the date of sale.

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2.5.3 Income From Shares

There are two types of income than can be generated from the ownership of the share:

income from the sale of the nomination attached to the breeder’s basic annual breeding right from the share either directly from the sale of the nomination or indirectly from the sale of the resultant progeny; and

the member’s share of the income from the sale by the syndicate of surplus nominations.

2.5.3.1 Income From Sale of Annual Breeding Right

Any income will be included as trading income with any write down in value being allowed as a deduction in calculating trading profits. This treatment also applies where the member sells any bonus nominations to which they are entitled.

2.5.3.2 Income From Sale of Surplus Nominations

As mentioned above, an unincorporated association is effectively taxed in the same way as a company and therefore any surplus income generated by the syndicate will be taxed in the syndicate and will be subject to the rules on distributions when it is distributed to the members. The syndicate has to produce annual accounts for each stallion and the profits shown in those accounts will be subject to corporation tax. As with a company, the syndicate members will be taxed on any distribution of these profits as if they were dividends received, and will therefore receive a tax credit.

2.6 Syndicates That Are Fiscally Transparent

A syndicate is fiscally transparent where it has been set up for the mutual benefit of the members directly and where the syndicate committee acts only as an agent for the members. Whether this is the case will depend on the wording of the syndicate agreement so this needs to be carefully considered. It should make it clear that all the risks and rewards of ownership are to be met by the members, in the relevant proportions, and that all gross income generated from the sale of surplus nominations will be distributed automatically to the members at agreed intervals, with the syndicate manager having no discretion in this matter. Where a syndicate is fiscally transparent the income and expenses will be treated as accruing directly to the members, in proportion to their holdings, rather than to the syndicate. The tax treatment of such a syndicate in relation to purchase/sale of shares, income from shares and income from the sale of annual breeding rights is the same as for an unincorporated association.

2.6.1 Income From Sale of Surplus Nominations

The tax treatment here is significantly different to that of an unincorporated association. Any income from the sale of surplus nominations will be distributed in full directly to the syndicate members and taxed in full on those members. The syndicate expenses will be met directly by the members who will receive a deduction for these costs against their taxable income. Their net income will then be taxed as income depending on the circumstances of the member, as previously outlined.

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2.7 Foal Sharing

This is where the owner of the (share in the) stallion agrees with the owner of the broodmare to split, in varying proportions, usually 50:50, the resulting proceeds from the sale of the foal or yearling which is the outcome from the mating concerned. Each person’s share of the proceeds will be taxed in the normal way as income in their accounts. The allocation of the costs of upkeep, insurance, etc of this joint venture are normally set out fully in the 'Foal Sharing' agreement.

2.8 Gifts of Free Shares or Nominations

Trainers and jockeys may receive free shares, nominations, or breeding rights on the syndication of a stallion when it retires to stud. The income which arises from this source is taxable in the recipient’s hands - including the value of a share in a stallion given to a trainer or jockey - as income arising from the particular profession of trainer or jockey.

2.9 Free Nominations in Respect of Keep

In order to reduce the costs of the syndicate committee in respect of keep it is often agreed that in lieu of this expense, the stud farm at which the stallion stands will receive free nominations. Any income which arises to the stud farm from the sale of the nominations will be taxed in the normal way as part of its trading income. The VAT implications of free nominations are discussed in the VAT section of this Guide.

2.10 Dual Hemisphere Stallions

As mentioned above, many stallions shuttle between the Northern and Southern Hemispheres, travelling from the UK in July to August and returning in December or January. The taxation treatment of the income earned while in the Southern Hemisphere is dependent on the arrangements under which the stallion stands. It is customary for the stallion to be leased to the stud in the Southern Hemisphere. In order for the income arising to the UK stallion owner not to be taxed in the Southern Hemisphere and possibly be subject to withholding taxes, the terms of the lease need to reflect a rental rather than trading arrangement. In other words, the stallion should be leased for a fixed rental to the Southern Hemisphere stud for them to exploit, with the risks and rewards associated with the transaction being transferred to the lessee, i.e. the income and expenses arising from the moment the stallion enters quarantine to his return to the UK. Any arrangement whereby the lease rental is linked to the total nomination income is likely to lead to the stallion owner being deemed to trade in the Southern Hemisphere jurisdiction. Independent professional advice should always be sought before engaging in such a transaction.

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3 Racing

3.1 Basic Principles

The major taxation issue facing anyone involved in the racing of horses is whether this constitutes a taxable activity. As discussed in Chapter 1, 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 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 excluded from any tax calculation. There are limited exceptions to the rule that racing activities do not form part of a trade and these are discussed below. It must be noted that what is considered a trade for indirect tax purposes is not necessarily the same as a business for VAT purposes. Please see Part 2 (VAT Guide) for a discussion of racing and VAT. In the case of an owner breeder, racing is often an integral part of a stud farm’s activities and arguably should be taxed as part of the breeding activity, yearlings being transferred from stud to racing and returned to stud after their racing career. The argument runs that the horse will need to be tested on the racecourse to determine whether it has the appropriate physical qualities such as speed, stamina and courage to justify its retention for a breeding career. Where this is the case, a breeder’s racing activities may exceptionally be regarded as an integral part of his breeding trade for tax purposes; the expenses of racing become an allowable deduction and winnings taxable in calculating trading profits. HMRC may accept by exception that fillies should be treated in this way as statistically a higher percentage return to their breeder’s stud operations. In most circumstances, HMRC generally regard the prospect of profit from racing to be too remote and so do not accept that it is a taxable trade. Rather, they regard it 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 and any prize money is non-taxable. If there is any doubt as to the correct tax treatment, advice should be obtained. 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 will 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, HMRC may, in certain circumstances, still raise an enquiry into the treatment by the individual of the occasional profit which they may make under the Self-Assessment regime. HMRC are however expected to take a consistent view when considering profit and loss making years. The offsets against general income and capital gains as detailed in S64 & S71 of ITA 2007 are restricted where breeding activities are not considered to be both carried on a commercial basis and with the view to making a profit. The usual carry forward of trade losses (S83) should however still be available, subject to the new cap on claimable tax reliefs not restricting the claim (see section 1.6 above). The cap on sideways loss relief will not be applied to brought forward losses. It is advisable therefore that full records are maintained to provide concrete evidence of a trade being carried out commercially with a view to making a profit in such a situation. A business plan, continually updated, is very helpful in this regard.

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3.2 Business and Racing

Horse racing today 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 therefore worth considering at this point 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. These types of expenses are almost always examined very carefully by HMRC. The general rule for deductibility is in Section 54 CTA 2009 and Section 34 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. 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. This is discussed further below. There is also 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 Section 439 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.

3.2.1 Advertising

Given the above, it is unlikely that a business will be able to claim a deduction for the cost of keeping and training a racehorse unless it can show that the expenditure is for the purpose of advertising its products. This will be dependent on the particular facts. In such circumstances any prize money from the horse will be taxable. In any case, the cost of purchasing a horse is unlikely to be deductible since it represents capital expenditure, whilst on the other hand leasing a horse is a revenue expense i.e. deductible against income. The factors that will determine whether advertising expenditure is incurred wholly and exclusively for the benefit of the trade include:

What is the purpose behind the expense – is it to provide a corporate entertaining package or is it genuine advertising?

What is the form of the advertising and is it in keeping with the company’s size, structure and image?

Is there evidence that the horse is being used for advertising purposes? Where the horse is named after the business or its products then the expenditure is more likely to be accepted as advertising. This will be a question of fact and you should ensure you keep good records.

Is the advertising likely to generate more business and has the decision to advertise in this way been based on commercial principles?

Is the amount spent reasonable in relation to the benefits claimed from the advertising or promotion?

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3.2.2 Sponsorship

In 1994 owner-sponsorship was introduced in racing. This allowed owners to obtain sponsorship and the sponsor to advertise on the jockeys silks, breeches, the horses rugs etc. Before entering into any sponsorship agreement, businesses should consider how such an agreement can be best structured for tax so that the maximum relief is obtained. Claiming a deduction for a sponsorship payment should in theory be no different to claiming a deduction for advertising expenditure. In structuring sponsorship there are a number of basic principles which should be followed.

1. The sponsorship agreement should be entered into by the trading business whose trade is to benefit from the sponsorship and not, for example, by a non-trading holding enterprise. Equally, where a horse or race is to be named after the company it should be named after the said business in the sponsorship agreement and the sponsorship should have a clear benefit to that particular business.

2. The expenditure has to be revenue in nature i.e. deductible against income, in the hands of

the payer since no deduction will be given where the business is incurring expenditure on fixed assets, for example, on the acquisition of a racehorse, or a share in a racehorse. Provided that it is for the recipient to decide how the money should be spent, then even if the recipient chooses to acquire a racehorse the cost to the payer’s business should still be deductible as a revenue expense.

3. As mentioned above, the main benefit of the expenditure must be to the trading business

which then needs to show that the sponsorship payment falls into the same category as its normal marketing and promotional activities. A deduction will be available if the business can show that the sole purpose of the payment is to help market its products and services and that any benefit to an employee or director is purely incidental.

The question of what is considered incidental was examined in McQueen v Revenue & Customs Commissioners 2007 STC (SCD) 457 where the owner of a coach company promoted the trade by racing a liveried rally car personally. In that case the personal satisfaction of Mr McQueen was considered to be incidental to the promotional activity so it could be considered that the mere enjoyment of racing will not conclusively rule out a deduction. In this particular case Mr McQueen claimed that he was interested in sailing yachts, so rallying was not necessarily his primary hobby. That the motive for a payment is important was made clear in the 1996 Special Commissioners case Executive Network (Consultants) Ltd v O’Connor. Here a company was making payments to the controlling shareholder’s wife and children who were competing in eventing and show jumping and claiming a deduction on the basis that they were sponsorship payments. The deduction was disallowed on the basis that it was not wholly and exclusively for the purpose of the company’s trade, even though it was accepted the sponsorship had generated new work. The Special Commissioners determined that ‘personal benefit played a part in the decision to make the sponsorship payments’, particularly as the amount of the payments was strongly influenced by the losses being made by the wife’s business. Even where there is no personal or family connection care needs to be taken where there is any benefit to the racehorse owner or trainer who is receiving the sponsorship funds, whether or not this is of primary concern to the sponsor. The case of Interfish Limited v Revenue & Customs Commissioners UKFTT TC520 and its subsequent appeal published in October 2012, considered sponsorship payments by the company to a Rugby Club. The director of Interfish had considerable involvement with the Club. The fact that the Club was seen to receive considerable benefit from the

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payment was deemed to prevent a deduction under S54 CTA 2009. The fact that Interfish’s business benefited as a consequence of the benefit to the Club did not stop any benefit to Interfish being considered a secondary purpose. As noted in the judgement, the requirement of being wholly and exclusively for the purposes of the sponsor’s own trade is a restrictive one. “It would be surprising if the provision allowed the deduction of sums laid out for the immediate purpose of promoting the trade of someone other than the taxpayer, particularly in circumstances where the “knock on” benefits to the taxpayer’s trade, whilst real, are intangible and hard to quantify.” If then by dint of a close acquaintance sums paid over in sponsorship can be seen to directly relate to specific costs, payment of which benefits for example the horse owner, this could well lead to the restriction or disallowance of any tax deduction. In Chepstow Plant International & Another v Revenue & Customs [2011] UK FTT 166 (TC) the company paid training expenses for several horses. HMRC sought to have the expenses treated as a benefit to the director in whose name the horses ran. The director could show he had no real interest in the horses and indeed never visited the trainer. It was held that as he did not have a personal interest he was not receiving a personal benefit, so was not liable to personal tax or national insurance. A final consideration is that it may be advantageous if the horseracing sponsorship is not the only promotional activity and that it forms just one part of a marketing programme. It is therefore helpful if the reason for the sponsorship is documented beforehand, for example, in the minutes of management meetings. Further details on race sponsorship are contained in the British Horseracing Board’s publication: Racehorse Owners' Sponsorship Code of Conduct’. Appendix V of this Part contains a number of extracts from the HMRC Business Income Manual setting out this position regarding the deductibility or otherwise of advertising/sponsorship expenditure. Theses extracts are helpful in that they illustrate the HMRC approach.

3.2.3 Sponsorship and Corporate Entertaining

A further benefit to a business of sponsorship, other than marketing and advertising its products, is that it may provide the business with a structured corporate entertaining package, for both staff and clients. As a general rule a business will only get a tax deduction for entertaining expenses that relate to the entertaining of staff (although the staff could face personal tax liabilities – see below). For this reason, sponsorship deals that include an entertainment package should be carefully structured so that the entertaining element, if any, can be separately identified and the size of any disallowable expenditure identified. It may be preferable to agree an allocation of cost, showing how much of it relates to entertaining, with the provider of the packages, rather than leave it to HMRC to suggest an apportionment on an inappropriate basis. Remember that the marginal cost to the racecourse of providing badges, and even a box, may be little or nothing if, as is regularly the case, racecourse attendance is less than capacity. There is often a fine line between what constitutes entertaining clients and what in effect is the rewarding of staff and the tax treatment is very different in each case. Where an employee is involved in entertaining clients then this is claimed as client entertaining and the business will not get a deduction for the expense. There will also be no benefit taxable on the employee. The opposite is true where the business is solely entertaining employees, for example by paying for a day at the

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races. In this case the business will be able to claim a tax deduction for the expense but the employee may be taxable on the benefit received. This issue is considered further in chapter 5. Further guidance is provided in the HMRC Business Income Manual (sections BIM 45005-45090). The VAT treatment of advertising and sponsorship is dealt with later in this Guide.

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4 Trainers

4.1 Introduction

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. The reasons for this are discussed below. A trainer’s income mainly consists of training fees, although some trainers now 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. Trainers usually own the premises from which they train; indeed in the case of a smaller trainer the training operation may well be run in conjunction with a working farm. Alternatively, the trainer may lease premises.

4.2 Basic Principles

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. The general principles which will be considered by HM Revenue & Customs in determining whether a trade is being carried on are considered in greater detail in Appendix VII. 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. If a trainer is only the part owner of a horse (shares are often retained at the request of the owners), HMRC are likely to argue a proportion of the associated costs should be allowed for tax purposes provided the owner/owners actually pay a training fee. If the other party merely paid for part of the purchase cost of the horse and does not pay a fee, HMRC take the view that none of the costs are deductible for tax purposes. Trainers should therefore ensure that they account for the costs associated with their own horses correctly, particularly if the training operation is run in conjunction

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with another business. Bear in mind that HMRC have mounted a number of enquiries into farmers registered as trainers who have included the expenses of training their horses in the accounts of the farming business.

4.3 Operating as a Sole Trader or as an Employee

The decision as to whether to operate as a sole trader or a salaried employee will depend on both practical and commercial considerations. These are discussed in Part 1 Chapter 6. However, it should be noted that where a trainer operates through a company it is often in circumstances where the trainer is not the main shareholder of the company and instead the company has been set up to allow others to invest in the trading operations. This gives a trainer operating as a salaried employee the added advantage that he will be able to concentrate on the training of horses while others consider the financial affairs of the business. A trainer operating as an employee should be aware of the provisions for taxing benefits provided to employees. These employee issues are discussed in greater detail in Part 1, Chapter 5, but the provisions relating to an employee’s accommodation are particularly relevant to a trainer who is provided with a house as part of his employment. In normal circumstances the accommodation would represent a taxable benefit on the employee. However, if the accommodation is job related there is no taxable benefit, (unless it is provided for a director), and it is likely that this will be the case here. This is discussed further in the guidance note to trainers on the provision of living accommodation for stable staff included in Part 3 of this Guide.

4.3.1 Owning and Leasing Land

A trainer who has a lease on his yard will be able to claim a full tax deduction for the rent paid, although if the rent includes a charge for the trainer’s house, no deduction can be claimed for the proportion of the rent representing the house, excluding areas used as offices.

4.4 Capital Allowances

A trainer operating as a sole trader will qualify for capital allowances on expenditure on certain items of plant and machinery. Further detail on the availability of capital allowances is outlined in Appendix I of this Part.

4.5 Entertainment

One of the major concerns of any trainer is attracting new owners and retaining existing owners and a number of marketing strategies are employed, including the provision of hospitality for existing and potential owners when visiting the stables and at the racecourse. The provision of entertainment to a customer is not deductible for tax purposes and therefore such costs are disallowed in computing the taxable profit of the trainer. On the other hand, the cost of the provision of hospitality packages as a separate trade from, or adjunct/addition to, training, including charging an arm’s length fee to individuals or companies taking up the packages, would be deductible. Care should be taken to ensure that any benefit arising for employees or directors from attending such events is reported to HMRC, if appropriate. Dispensations can be obtained in certain

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circumstances to minimise paperwork but records should be maintained of any entertainment provision.

4.5.1 Racing Clubs

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.

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5 Employee Issues

5.1 Introduction

Employment issues are relevant to all the sectors being considered in this book; breeding, racing and training, and the tax treatment of potential employee benefits is of particular importance.

5.1.1 Status

Before considering the treatment of employees it is important to review whether workers should be considered to be employed or self-employed. Businesses will often have permanent or temporary employees but also require the services of self-employed contractors on a regular or intermittent basis. In racing self-employed contractors can include book-keepers, work riders, and farriers. A worker’s employment status, that is, whether they are employed or self-employed, is not a matter of choice and it is important for both the worker and the engager to consider the employment status of the worker. For the self-employed there are obligations to comply with the requirements of both National Insurance and Self Assessment. For the employer there will be requirements under PAYE and also for example for compliance with the Working Time Directive and the National Minimum Wage legislation. If HMRC successfully challenge the contention that someone is self-employed and re-designate them as employed, this will increase the costs for the employer and employee and penalties and interest may well be levied on unpaid tax and NIC. Also, there might be implications in relation to the National Minimum Wage (NMW). Therefore establishing the full facts and intentions of both parties before the commencement of the working arrangement will reduce the risk of a successful challenge. Should a worker be classed as an employee this will also mean that they acquire additional rights and the employer will have additional obligations towards them e.g. they will have protection against any form of discrimination on the grounds of age, race, disability etc., rights with regard to hours worked and the ability to go to an employment tribunal. From the employer’s point of view they will need to ensure the NMW is paid (with restrictions on the deductions they can make see section 5.1.3) and also the new rules with regard to pension schemes with effect from 1 October 2012 will also have to be adhered to (see section 5.1.4). With regard to minimum wage rates the rates that have been agreed with the National Trainers Federation concerning stable employees should be applied. The NTF have guidance on employee matters as detailed on their website. General guidance on employment status can be found at the HMRC website. Outside training, care needs to be taken not to fall foul of the NMW legislation particularly in relation to “working pupils”. However, of particular use is the Employment Status Indicator found at the following location:

http://www.hmrc.gov.uk/calcs/esi.htm In addition, leaflet es-fs2 provides further assistance in determining status. This leaflet is primarily aimed at potential workers but is helpful in deciding what HMRC’s view might be with regard to individual staff. http://www.hmrc.gov.uk/leaflets/es-fs2.pdf

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The following guidance is included in the leaflet as issued by HMRC and can be used in considering employment status. There may well however be no definitive answer so it is important to ensure evidence is available to support the engager’s viewpoint should HMRC challenge the status of for example, self-employed work riders.

5.1.2 Employed or Self-employed

As a general guide if the answer is 'Yes' to all of the following questions, then the worker is probably an employee: An individual worker is likely to be employed if the answer is ‘yes’ to most of the following questions:

Do they have to do the work themselves?

Can someone tell them at any time what to do, where to carry out the work or when and how to do it?

Does the worker have to work a set number of hours?

Can you move the worker from task to task?

Is the worker paid a regular wage or salary?

Can the worker get overtime pay or a bonus payment?

Is the worker responsible for managing anyone else engaged by you? Your worker is likely to be self-employed if the answer is ‘yes’ to one or more of these questions:

Can the worker hire someone to do the work, or take on helpers at their own expense?

Can the worker decide where to provide the services of the job, when to work how to work and what to do?

Can the worker make a loss as well as a profit?

Does the worker agree to do a job for a fixed price regardless of how long the job may take? If you can’t answer ‘yes’ to any of the above questions, your worker is still likely to be self-employed if you can answer ‘yes’ to most of the following questions:

Does the worker risk their own money?

Does the worker provide the main items of equipment (not the tools that many employees provide for themselves) needed to do the job?

Does the worker have to correct unsatisfactory work in their own time and at their own expense?

It is important to have evidence that self-employed contractors are paying tax and National Insurance in their own right. Keeping details of their tax references (their 10 digit unique taxpayer reference or UTR), their National Insurance number, name and address and the amounts paid to them is the minimum requirement. If they are VAT registered then their VAT number should be on any invoices supplied which will provide further evidence they are self-employed.

5.1.3 Casual Workers

The status of casual workers as either self-employed workers or employees is often difficult to establish and the consequences of getting it wrong can be expensive if they are designated as employees for the reasons stated above. Therefore particular care should be taken with these workers to establish their status and ensure compliance with tax and legal obligations.

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5.1.4 National Minimum Wage

The employer should review current and future working arrangements taking into account the following to avoid a claim arising from employees. This is an area where there are growing numbers of claims being made and PAYE reviews can pick up issues if HMRC visit premises.

The minimum wage details are shown at the following site: http://www.hmrc.gov.uk/payerti/payroll/pay-and-deductions/nmw.htm However, different rates can apply for workers in the equine industry and reference should be made to Part 3 of this Guide which is an extract from the National Trainers Federation guidance on employees. This provides worked examples showing the salary calculations. The National Trainers Federation full employment guide can be obtained from their website.

5.1.5 Real Time Information (RTI)

RTI applied with effect from 6 April 2013 so existing employers should already have systems in place to make appropriate reports and payments otherwise they risk incurring penalties. For new employers or existing employers who have not yet addressed this issue a website link is provided below. http://www.hmrc.gov.uk/payerti/getting-started/index.htm Operating a PAYE scheme under RTI requires software to be obtained. Employers may prefer to use a specialist PAYE bureau to minimise the time spent by the employer on payroll matters now that the reporting requirements are more onerous. Employers will need to report payroll information electronically on or before the day they pay their employees. Tax and national insurance will be payable to the Collector of Taxes on the normal payroll due dates for the employer.

5.1.6 Pension Schemes and Auto-enrolment

With effect from 1 October 2012 new rules applied to pension provision for employees and detailed below are relevant questions an employer needs to ask to comply with the new regulations

Do you make contributions on behalf of qualifying staff? This will be necessary under pension’s auto-enrolment.

How will you explain the implications of auto-enrolment to employees? The new rules oblige employers to inform staff that they will be automatically enrolled into a pension scheme, to explain their options and that they must retain copies of communications sent to them. These rules can be found at www.nestpensions.org.uk

The Timetable All employers will have to comply with auto-enrolment. In order to make this as manageable as possible a stages implementation process has been adopted.

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Auto enrolment dates have been staged over several years with employers with less than 250 employees having to register from February 2014 and those with less than 30 in April 2017. Employers should consult their pension scheme provider, independent financial advisor or accountant/tax advisor as soon as possible.

5.2 Employees Benefits in Kind

In general, where an employee earning £8,500 or more (including the value of benefits) is provided with, by reason of his employment, any benefit that is not otherwise charged to tax as his income, then the cash equivalent of the benefit will be taxed as part of his earnings. The governing law is given in the general charging provisions of Section 201 Income Tax (Earnings and Pensions) Act (“ITEPA”) 2003. This covers all benefits other than those that are specifically included elsewhere in the legislation, for example the provision of cars and car fuel, vouchers and living accommodation. As mentioned above, in general an employee will be taxed on the cash equivalent of any benefit received. The exception to this is where the benefit is provided ‘in-house’, for example, the provision of accommodation for a horse e.g. a hunter chaser for an assistant trainer. In this case the employee will be taxed on the marginal cost to the business of providing the benefit, following the decision in the 1992 case Pepper v Hart. Two areas where benefits arise which are particularly relevant here are the provision of living accommodation and staff entertaining. These are considered as follows:

5.2.1 Taxation of Accommodation

A guidance note issued to trainers that deals with the tax treatment of living accommodation for stable staff is included in Part 3 of this Guide. This guidance note relates to stable employees. There is no formal agreement for stud staff though many studs will have negotiated individual agreements. The general rules with regards to accommodation will apply where there are no separate agreements in place. These general rules are as follows: If the accommodation is job related, there is no taxable benefit. Job related accommodation is that which is either:

a. necessary for the proper performance of the duties of the employee OR b. both customary AND enables the better performance of the employees duties OR c. where there is a special threat to security.

This applies to all employees except directors, however much they earn. Directors with a shareholding of more than 5% can only claim the exemption under c above. Where neither the Directors, or any members of his family have more than 5% of the share capital of the company a and b can apply. If the accommodation is exempt the following amounts, whether paid on behalf of or reimbursed to the employee, are also excluded:

Council tax

Water charges

Sewerage charges

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If other items are paid for or provided to the employee such as utility bills or furniture these are assessable on the employee but the assessable amount is restricted to 10% of the employee’s earnings (as defined in the Taxes Act). If the accommodation is not job related there will be a benefit assessed on the employee. The benefit will be valued at the greater of the gross rateable value and the rent paid by the provider of the accommodation, if applicable. There is an extra charge where the total cost of the property is greater than £75,000. Any rent paid by the employee towards the accommodation will be deducted when calculating the benefit. Living expenses as mentioned above are not a taxable benefit for those earning less than £8,500 per annum, where the £8,500 includes all benefits as set out in Part 3 of this Guide, provided the costs are met directly by the employers. There will be a taxable benefit for employees earning more than this amount. The value of the benefit will depend on whether the accommodation is job related or not. If the accommodation is not job related then the benefit will be valued at the cost of the expenses; if it is job related the benefit is valued in the same manner but is limited to 10% of the employee’s earnings.

5.2.2 Taxation of Staff Entertaining

As discussed in Chapter 4, employees may be subject to a taxable benefit where a company is involved in staff entertaining. The employee will be taxed on the cash equivalent of the entertaining expenditure. For example, when an employer spends £50 on a night out for the employee, they will be taxed on a benefit of £50. (Expenditure on annual parties and functions is exempt provided expenditure does not exceed £150 per head. If the £50 is exceeded the whole benefit is taxable). Under the guidance given by Pepper v Hart an employee can argue that he should be taxed on the marginal cost to the company. This will be relevant where an employer provides staff entertaining as part of a sponsorship package. For example, an employer may decide to sponsor a major racing event, by funding the prizes, publicity and marquees and may receive day tickets at no extra cost. If it makes these available to its employees, then the benefit to the employee is arguably nil. However, HM Revenue & Customs may question such an arrangement closely to determine whether the employees do actually receive a taxable benefit. Clearly employers must take great care in this area and document all their decisions and the reasons behind them. There will be many other issues to address as part of the overall decision making process. Isolating ‘marginal’ costs is therefore a key area for tax purposes and companies need to decide whether it would be better to offer up a small PAYE liability calculated by establishing a marginal cost if tickets have been received at a bulk discounted rate well below normal market value. Alternatively, employers may decide to strip out all client entertaining and staff-related costs from the sponsorship package.

5.3 Taxation of Bonus Payments and Pool Money Received by Stable Staff

The share of prize money allocated to the yard for distribution among the stable staff is known as Pool Money. It is not unusual for winning owners to also make an ex-gratia payment to be shared amongst the yard’s staff. Both payments are earnings for tax purposes and should be taxed under PAYE through the payroll when the payment to the staff is made. Please see recently issued guidance at 5.8. For National Insurance purposes HMRC are prepared to accept the payments as a gratuity and therefore excluded from earnings if they simply pass through the employer’s, i.e. the trainer’s, hands. The payments of Pool Money or bonus payments can pass through the employer’s bank account

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without compromising the National Insurance treatment. The exclusion will not apply where the employer decides how the money should be shared out; to obtain the concessional treatment the employer (trainer) should play no part in the decision making process.

5.4 Stable Lad Subsistence Allowance

HMRC publish specific allowances that employees of racehorse training or stud farm establishments can, by concession, receive tax free when away from their normal place of work. Allowances are updated occasionally and can be found at the following page of the HMRC website: http://www.hmrc.gov.uk/manuals/eimanual/eim68515.htm

Current allowances from 1 April 2014 are as follows:

It is standard for an amount of £30 per day to be paid on a Sunday of which £12 is tax free and £27 per day can be paid for travelling abroad of which £21 is tax free. Where a Sunday Racing payment or Racing Abroad allowance is paid any additional daily subsistence allowance should be taxed. The provision of 'modest' free accommodation in a lodging house or at the race course should not give rise to a benefit in kind for the employee.

5.5 Annual Settlement

In circumstances where an employee is taxable on a benefit received, a company can pay the tax on the benefit by entering into a ‘PAYE settlement agreement’ (PSA) with their local PAYE office. PSAs were introduced in the 1996 Finance Act to replace the ‘annual voluntary settlement’ system. They allow employers to settle in one payment the income tax liability on minor benefits which are not paid to employees on a regular basis and/or where it is impractical to assess the benefit individually. The benefits included in the agreement do not then have to be included in Forms P9D and P11D or on an employee’s tax return, if applicable. They therefore provide flexibility to an employer and mean that an employee does not have to suffer the tax on the benefits they receive which are covered by the agreement, as the employer effectively meets their tax liability. This will, of course, increase the cost of the benefit for the employer. The employer has to make the payment agreed on the PSA by 22 October following the end of the tax year to which the PSA relates. PSA agreements have to be revisited and agreed each year with HMRC. To apply for a new PSA the employer or their advisor should write to: HMRC Local Compliance Specialist Employer Compliance S0794 PO Box 3900 Glasgow G70 6AA

Allowance Rate (£)

Daily up to 6 hours 7

Daily 6 - 8 hours 9

Daily 8 hours or more 14

Sunday racing payment 30

Racing abroad payment 27

Overnight allowance 13

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5.6 Dispensations

If a business provides any employee or director with goods or services, pays for any bills on their behalf, or reimburses expenses incurred by the director or employee (including business expenses) which the employee can claim as an expense, then the employer needs to consider whether these items need to be included on a form P11D. In order to simplify the P11D process by excluding most items where there would be no net taxable benefit, it is possible to apply for a dispensation from HMRC that specifically permits such omissions from the P11D. By concession HMRC will apply the dispensation from the start of the tax year in which the application is made. It is recommended that all businesses review their circumstances as there is often a cost benefit in reducing their compliance obligations. Please note that accurate records of benefits need to be maintained even if a dispensation is in place. The dispensation should be reviewed each year by the employer to confirm that: a) the terms of the dispensation are being compiled with b) there have been no changes in the existing amounts paid which exceed the terms of the

dispensation c) if there are any new expenses being paid which could be included in the dispensation to save

paperwork. Regular reviews should identify areas of weakness and vulnerability to HMRC attach during a PAYE compliance visit.

5.7 Revenue Guidance – Additional Payments by Employers and Horse Owners

PAYE70275 PAYE Operation: Specific Employments: Racehorse Trainers / Stud Farm Employees Where an employee of a racehorse trainer or stud farm receives payments in addition to wages (see the Employment Income Manual (EIM) at EIM68500), these are assessable as employment income. Payments Made by the Employer Payments may be made:

By the employer on his or her own behalf or

By the employer on behalf of a third party such as a racehorse owner Examples of payments are:

A percentage of prize money for a winning horse

A percentage of racehorse stake money

Fees for leading a horse between stable, stud farm or station

Presents for mares in foal

Groom fees

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Such payments should be taxed under PAYE by the employer in the normal way along with the wages or salary of the employee. The payments are also liable to National Insurance contributions. Horse owner makes payments direct to employee of a trainer or stud farm. Where payments are made direct to an employee by the horse owner, the owner is required to operate PAYE. The employer is liable for Class 1 NIC on such payments and the owner should advise the employer of the payments. In any case of difficulty, consult PAYE Technical Advice - Shipley.

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6 General Direct Tax Issues

As has been seen from the discussions above, the tax treatment of some elements of the racing industry has evolved over time and has become specific to these industries. However, there are still some basic rules that should be considered. These are set out below.

6.1 Planning the Trading Vehicle

Where HM Revenue & Customs determine that a person is operating a trade, the profits from that trade will be taxed as trading income. This is the case whether the trade is operated through a company or otherwise. The tax paid will, however, vary depending on the type of operating vehicle for the trade, the main difference being that broadly, a company is subject to corporation tax on any taxable profits at the effective rate shown below: Corporation Tax Rates

Taxable profits April 2012- March 2013

April 2013- March 2014

April 2014- March 2015

April 2015- March 2016

First £300,000 20% 20% 20% 20% *

Marginal rate used Between £300,000 And £1,500,000

25%

23.75%

22.5%

N/A

Balance over £1,500,000

24% 23% 22% 20% *

*The small companies’ rate and main corporation tax rate are unified to 20% from 1 April 2015.

Some of the above rates have been proposed by the Coalition Government but are subject to Parliament passing the relevant legislation or may be amended in future budgets. A sole trader is subject to income tax at a marginal top rate of 45% (50% prior to 5 April 2013). It is therefore important that professional advice is taken when commencing a trade to determine which vehicle is best for the enterprise concerned. The main differences between the three most common options, operating through a limited company, as a sole trader or via a husband and wife partnership are discussed below. A company’s losses cannot be used against the shareholder’s personal income, whereas losses made by individuals can (subject to certain restrictions) be set against personal income. The decision will depend on the activity being carried on, whether it be racing or breeding or a mixture of the two. For example, where an individual is carrying out a racing activity this is not taxable and therefore different criteria have to be considered. Racing is rarely a profitable activity and therefore there will be an obvious benefit in operating through a limited company since that company will have limited liability and the individual will only be liable for any losses to the extent of his shareholding in the company. That said, in practice an individual is likely to guarantee any borrowing to support a loss making venture. On the other hand, where there are profits or capital gains from racing these will not be taxable in either a company or on a sole trader. Where they arise in a company and the individual wishes to withdraw the related profits from the company, if these are withdrawn via the payment of a dividend then the individual will be taxed on that dividend. This would have been avoided if the racing activity were operated directly by the individual or other transparent entity.

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6.1.1 Trading as a Sole Trader

Where a person operates a trade as a sole trader, he will be subject to income tax on the tax adjusted trading profits at his top marginal rate of income tax. At the current rates this could be 50% or 45% from 6 April 2013. Any trading losses, provided they are not restricted due to the trade not being run on a commercial basis (see section 1.6), can be relieved against any other current year or prior year income, again subject to the overall cap on tax reliefs which will be applied with effect from 6 April 2013 (section 1.7 refers) or against future profits from the same trade. The trader will also have to pay Class 2 and Class 4 National Insurance contributions at the current rates. These notes can be found at www.hmrc.gov.uk/rates/nic.htm.

6.1.2 Trading Through a Husband and Wife Partnership

Where a husband and wife are both actively involved in the trade and particularly where the stable premises are jointly owned, operating the training business as a husband and wife partnership can have certain tax advantages. The income tax liability of each spouse would be based on their share of the tax adjusted business profits thus maximising the lower rates of tax. The national insurance liability, classes 2 and 4, needs to be considered as this may impart on the overall benefit of trading through a partnership. The introduction into the business of a spouse as a (working) partner will help to ensure that the spouse’s interest in the business premises qualifies for Entrepreneurs Relief for Capital Gains and also for Business Property Relief for Inheritance Tax, subject to the other conditions being met. The spouse can be a limited partner and still get Entrepreneur’s Relief and Business Property Relief. As with any form of planning, the particular circumstances of each case should be considered. Limited Liability Partnerships (LLP) can be appropriate in certain circumstances and in recent years this structure has become more popular. The LLP combines most of the features of a partnership in terms of transparency for income tax and capital gains tax purposes. In the event of a claim against the partnership, liability can be restricted to the assets of the partnership and the assets of the person against whom the claim is made. The assets of the other partners are not usually at risk. This can be compared with a general partnership where all the assets of both the partnership and all of the partners are at risk in the event of a substantial claim. The partnership can be structured to have companies as well as individuals as partners. This can be advantageous in specific circumstances. However, please note that HMRC are introducing new tax treatments for partnerships containing companies or trustees so advice should be obtained before entering into a partnership arrangement. LLP’s have to lodge their accounts with Companies House in the same way as a company, whereas general partnerships do not have to publish their results.

6.1.3 Trading Through a Company

The business profits will be computed as trading income in accordance with the Taxes Acts and subject to corporation tax. The rates of corporation tax for the financial year starting on 1 April 2013 are as follows:

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Taxable Profit

Rate of Corporation tax

Notes

Up to £300,000

20%

Between £300,000 and £1,500,000

23%

The tax charge is reduced by: 1/100 x (£1,500,000-P) x (I/P) Where I is the taxable profits of the company and P is these profits adjusted to include the non-group Franked Investment Income of the company.

Over £1,500,000

23%

These bands are reduced where the company has associated companies that is other active companies under common control. Shareholdings of spouses, minor children and other relatives can be attributed to the shareholding in determining control for this purpose. Since 1 April 2011 the rules relating to associated companies were amended, so that in determining control, the shareholdings of other relatives are not attributed unless there is “substantial commercial interdependence”. This term includes the following indicators:

Financial interdependence

Economic interdependence

Organisational interdependence Given that the corporation tax rate on profits is lower than the income tax rates there is at first sight an obvious advantage to trading through a company. However, if the shareholder wishes to withdraw the profits from the company then these profits will be taxed again on that individual, as employment income if the funds are withdrawn by the shareholder taking a salary, or as investment income if the shareholder is paid a dividend. Where the shareholder is paid a salary the company will, provided the salary is not excessive, receive a tax deduction for that salary. The individual will then pay income tax on that salary. National Insurance contributions will also need to be paid. The rates of National Insurance can be found at www.hmrc.gov.uk/rates/nic.htm. Shareholders receiving a dividend will be treated as receiving a non-repayable tax credit which is calculated as one ninth of the net dividend. If the company makes losses these can be set off against total taxable profits of the same period, total taxable profits of the previous twelve months or against future profits of the same trade. This mechanism is similar to that applied to a sole trader. Where the trade is operated from a company that is part of a group of companies any losses can also be passed on to other companies in the same 75% group. A 75% group exists where one company is a 75% or more owned subsidiary of another, or both are 75% or more owned subsidiaries of the same company. Therefore, it may be advisable that, where an individual who already owns a group of companies decides to set up a trade in a new company and anticipates that the trade will make losses, for the company to be held as a member of the group of companies. The long term implications should also be taken into account. For example, what will the shareholder do when and if he wants to sell? If the shareholders decide to sell the shares in the company then the proceeds will flow up to a holding company in the group and this holding company may have to

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pay corporation tax on the capital gain, subject to the availability of Substantial Shareholdings Exemption (SSE). SSE is available on the disposal of a shareholding in a trading company by a company which holds in excess of 10% of the share capital of the company and has held these shares for more than 12 months at any time in the past two years. If these proceeds are then distributed to the shareholder they will be treated as investment income in their hands and give rise to a further charge to income tax. This obviously may not be tax efficient. There are other ways in which the value can be taken out of a company.

6.2 Capital Gains Tax ("CGT")

Neither horses which form part of the bloodstock of the stud farm nor racehorses in training are subject to CGT for the following reasons; The bloodstock forms part of the commercial activity of the stud farm and will normally be treated as stock-in-trade. They are therefore not fixed assets for the purpose of CGT. Racehorses in training are both tangible moveable property and 'wasting assets' as defined by Section 44 'Taxation of Chargeable Gains Act (TCGA) 1992', as they have a predictable life of less than fifty years, Section 45 TCGA 1992 states that "no chargeable gain shall accrue on the disposal of or an interest in an asset which is tangible moveable property and which is a wasting asset." The exception to this wasting asset rule is where an asset is used solely for the purposes of the trade and the expenditure is eligible for capital allowances. This exception does not apply to racehorses in training as this activity is not treated as a trade and so the horse is not eligible for capital allowances. Horses held as stock do not qualify for capital allowances.

6.3 Inheritance Tax (“IHT”)

6.3.1 General

The liability to inheritance tax primarily arises on death. The deceased's estate is valued at that time and if the chargeable transfer exceeds the nil rate band of £325,000, where this threshold will apply at least until 5th April 2015, under current regulations IHT will be payable unless one of the exemptions applies. The most common exemption applies where the estate is passed to a surviving spouse. Since 2007 this exemption has been extended to allow any unused nil rate band to also be passed to the surviving spouse. This could mean that on the death of the surviving spouse the nil rate could be doubled (i.e. to £650,000 on current figures). A general description of inheritance tax is set out in Appendix II of this Part.

6.3.2 Reliefs Available

In the present context, the IHT reliefs which are of particular significance are Agricultural Property Relief and Business Property Relief. These forms of relief are considered below. Agricultural property relief takes precedence over a claim for business property relief if both forms of relief are available on the same asset. Agricultural Property Relief (“APR”) APR is available where an individual or partnership transfers land and buildings that they own and which are used for agricultural purposes. It is also available in respect of transferred shares or

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securities in agricultural companies to the extent that their value is attributable to agricultural property provided that the transferor has control of the company immediately before the transfer. Land and buildings used for the breeding and rearing of horses qualify for APR (IHTM24068). The land must be in the UK, Channel Islands, Isle of Man and for transfers after 22 April 2009 land in the European Economic Area (EEA). The farmhouse or stud manager’s house can in principle be included within the definition of APR. However, HMRC are reluctant to give APR on farmhouses and there have been several cases where relief has been denied. The house must be both of a character appropriate to the enterprise and must be occupied for the purposes of running the stud. Provided that certain other conditions apply, a deduction of 100% of the agricultural value is available if:

the interest of the transferor carries the right to vacant possession (or the right to obtain it within 24 months); or if

the occupier of the land was granted a lease of the land after 1 September 1995. In other cases the relief is restricted to 50%. It is important to remember that APR is only available on the agricultural value of the land, i.e. the value of the land as though it were subject to a perpetual covenant preventing its use other than for agriculture. This value may be considerably less than the market value of the land. Exceptionally the land occupied by the stud may be subject to an Agricultural Holdings Act 1986 tenancy. If this is the case, relief will be restricted to 50% unless further steps are taken to alter the tenancy. This is a complex area so specialist tax and legal advice should be obtained to ensure relief is not lost. For relief to be available one or other of the following ownership and occupation conditions is satisfied:

the property has been occupied by the transferor and used for agricultural purposes for a period of two years prior to the date of the transfer; or

the property has been owned by the transferor for a period of seven years prior to the date of the transfer and has been used for agricultural purposes throughout that period either by himself or another.

If the gift of agricultural property becomes chargeable because it was made within seven years of the death of the donor, it must be held by the donee throughout the period up to the donor’s death and still remain agricultural (i.e. occupied for purposes of agriculture) during that period for relief to be given. The breeding business does not necessarily need to be carried on commercially to attract APR. However, there must be clear evidence that the land is being used primarily for the purpose of breeding horses (IHTM 24253). Business Property Relief “BPR” Relief is also available on the transfer of ‘relevant business property’ provided that it has been owned for a minimum period of two years.

Relevant business property comprises:-

Applicable rates

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Property consisting of a business or an interest in a business (e.g. sole trader, share in partnership - including breeding stock).

100%

Unquoted securities of a company which, together with other securities and unquoted shares, gave the transferor control of the company immediately before transfer.

100%

Controlling holding in quoted trading companies.

50%

Any unquoted shares in a trading company.

100%

Land, buildings, machinery and plant which immediately before the transfer was used wholly or mainly for the purposes of a business carried on by a company controlled by the transferor or by a partnership of which he was then a partner.

50%

Land, buildings, machinery and plant which immediately before the transfer were used wholly or mainly for the purposes of a business carried on by the transferor and were settled property in which they were then beneficially entitled to an interest in possession.

50/100%

Unlike APR, the breeding business must be carried on commercially with a view to profit before BPR is available. BPR is also available on property used for other business operations such as consigning or pinhooking which may not qualify for APR. BPR is available on the full market value of the property (as opposed to the agricultural value) used in the business (less any borrowing). Consequently if development value is in point the market value may be £1,000,000 per acre whereas the Agricultural Value may only be £10,000 per acre. Debts The 2013 Finance Act introduced new rules excluding “double” relief for APR and BPR where funds are borrowed to acquire business or agricultural property. Please see section 8. Other Issues Shares in an unquoted trading company carrying on commercial bloodstock breeding activities, should attract business property relief at 100%. BPR is available where the business is not wholly or mainly the making of investments. The transfer of shares in a company which does not carry on a trading activity is very unlikely to attract business property relief. For example, a company whose activities include the holding of let property or racing. Again, the business property will still need to be held by the donee at the donor’s death and remain as business property if the donor dies within seven years of making the gift, for relief to be given (unless the property gifted is shares in an unquoted trading company).

6.4 Enterprise Investment Scheme

The Enterprise Investment Scheme (“EIS) is designed to offer to members of the public an incentive to invest in unquoted trading companies by offering them a tax effective means of doing so.

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EIS relief is only available for companies engaged in a qualifying trade. A company is engaged in a qualifying trade if, during a period of three years following the issue of the EIS shares, its activities do not include to any substantial extent ‘excluded activities’. Since 17 March 1998 “farming” has been an excluded activity and HM Revenue & Customs regard the commercial breeding of livestock as farming. Bloodstock breeding is, however, not an excluded activity where it is carried out without the occupation of land. Farming is defined as the occupation of land for the purposes of husbandry. Therefore, provided the EIS company does not occupy any land (either by owning it or by lease) then EIS should be available. Boarding fees need to be paid to the stud owner. A number of investors in pinhooking operations have taken advantage of the EIS. An advance clearance procedure is available to ensure that the activity to be carried out by the company comes within the legislation and this clearance procedure should be used. HMRC are unlikely to allow EIS on any company with horses in training. The tax reliefs afforded by investment in EIS companies are: Income Tax

30% (20% for shares issued prior to 5 April 2011) relief for shares up to an annual investment of £1,000,000 (£500,000 prior to 6 April 2012).

Income tax relief is dependent on several conditions including the requirement that an individual investor and his connected parties may not own more than 30% of the share capital of the company. Care should be taken when different classes with different voting rights might inadvertently breach the limit.

The company has to fulfil the detailed conditions required by the legislation for 3 years to prevent the relief being withdrawn.

Capital Gains Tax

Gains on EIS shares are tax free where income tax relief has been received.

Capital gains can be deferred by reinvestment into an EIS company. If only CGT deferral is sought the 30% ownership limit does not apply. If only CGT deferral is received, any gain on the EIS shares will be subject to CGT on their disposal. The deferred gain will fall into charge on the disposal of the EIS shares without further reinvestment into EIS shares.

Seed Enterprise Investment Scheme (SEIS) For shares issued after 5 April 2012, the SEIS scheme can apply. The tax breaks available are as follows:

Up front income tax relief of 50% for subscriptions of shares by investors (with a carry back facility to the previous tax year for investments in 2013-14 and beyond). The 50% relief is given as a deduction against the year’s income tax liability.

No capital gains tax on the disposal of scheme shares which are held for more than three years.

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One off exemption from capital gains tax on disposals of other assets in the tax year ended 5 April 2013 where gains are reinvested in SEIS shares in the same tax year.

It will be possible, as a one-off concession, to carry back an investment made in 2013-14 against gains arising in 2012-13. 100% of the investment can be carried back to the previous year subject to the annual maximum SEIS investment in 2012-13 not being breached if there has already been a claim for CGT exemption based on SEIS investments made in 2012-13.

In addition to the above, if an investment is made in 2013-14 and not carried back against 2013-13 gains then 50% of the investment (subject to the maximum SEIS limit in the year) can be set off against gains arising in 2013-14 so that those gains are exempt from capital gains tax as well.

The investors have certain qualifying conditions:

Annual investment limit of £100,000.

Directors can qualify but employees cannot.

No substantial interests allowed in the company (broadly interests greater than 30%).

The main company qualifying conditions are:

The company’s qualifying trade must not be more than two years old.

There are the same exclusions from a “qualifying trade” as for the EIS scheme e.g. leasing, property development etc.

The company must not be under the control of another company.

The company must have a permanent establishment in the UK.

The company must have fewer than 25 employees.

The company must have gross assets of less than £200,000 at the time of investment.

The company will be able to raise a total of up to £150,000 under the scheme (total and not an annual limit).

Once 70% of the SEIS funds have been utilised, the company may raise further funds under the EIS or Venture Capital Trust schemes.

Professional advice must be sought where an EIS or SEIS investment is contemplated as non-compliance with the strict regulations, particularly during the investment process and afterwards can result in relief being withdrawn or lost.

6.5 UK Taxation Implications for Non-domiciled UK Residents (NDUR)

General

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The legislation in relation to UK tax for foreign nationals or NDUR’s has been the subject of material changes in recent years. Significant changes from 6 April 2013 in how residence is defined in the UK have changed how residence is established so specialist professional advice should be sought in relation to foreign nationals and other non UK residents coming to the UK. The tax treatment for various taxes is determined by residence as well as the person’s domicile for UK tax purposes. Advice should again be taken to establish a person’s domicile so that income and gains can be properly recorded. For UK tax purposes, domicile and residence are separate concepts, with domicile being largely determined by reference to a taxpayer’s origin (usually via their father) as well as their own long term intentions. Again, advice to determine domicile should be taken. Further details can be found in Appendix III of this Part.

6.6 Single Farm and Other Rural Payments

Rural Payments, such as the Single Farm Payment, are currently available to stud owners and trainers in England and Wales providing they meet the qualifying criteria for the scheme. In addition, further grants are available to landowners through the DEFRA Environmental Stewardship Scheme. The Rural Payments Agency has also indicated that they could consider horses as eligible for grazing on set-aside land. Due to the intricacies of these payments they will not be discussed in detail in this Guide, however, payments received are usually treated as taxable income which is subject to income tax. Further information can be obtained from the Department for Environment, Food and Rural Affairs or the Rural Payments Agency. Please note that currently the single farm payment scheme is being debated within the EU with a view to potentially changing the way it is paid and to whom. It is likely that caps will be introduced on the level of payment that can be received. It is currently proposed the new system will apply as and when agreement has been reached within the EU. The original timetable has already slipped so it is difficult to predict when these new rules will come into effect. Advice should be sought on the purchase of new land or a new farm to ensure eligibility to SFP, or its successor, is not jeopardised.

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Anti-Avoidance Provisions

7 General Anti-Abuse Rule (GAAR) – Important New Legislation

From this year all taxpayers will have to take GAAR into consideration in any tax planning. This new legislation will have effect for any “arrangements” which were entered into after 17 July 2013, the date the Finance Bill 2013 became law. The policy objective is to deter taxpayers from entering into abusive arrangements, and to deter would- be promoters of tax schemes from promoting such arrangements. If a taxpayer goes ahead with an abusive arrangement, then the GAAR operates so as to counteract the abusive tax advantage which he or she is trying to achieve. The counteraction will be a tax adjustment which is just and reasonable in all the circumstances, not necessarily the one that raises the most tax.

7.1 The GAAR Applies to the Following

Income Tax

Capital Gains Tax

Inheritance Tax

Corporation Tax

Stamp Duty Land Tax (SDLT)

Petroleum Revenue Tax

ATED (The annual tax on enveloped dwellings)

It is intended that the GAAR will be extended to cover National Insurance Contributions in due course. Advice should be sought in relation to any arrangement designed to minimise a tax liability to ensure that the GAAR is not brought into play.

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8 Inheritance Tax and Loans

The inheritance tax (IHT) rules allowing deductions for liabilities owed by the deceased on death from the value of their estate were amended for deaths and chargeable transfers occurring on or after Royal Assent in July 2013. In some circumstances, the changes bring in new conditions for the deduction to be allowable or restrict the deduction, so that a tax advantage resulting from the scheme or arrangement does not arise. The new regulations will not affect the individual borrower per se as it will be the Executors or Personal Representatives of the Deceased who will have to apply the provisions. However, individuals will have to review their current will provisions and loan arrangements to make any appropriate changes to avoid any unexpected IHT liabilities falling due on their estate.

8.1 Previous

IHT is normally chargeable on the net value of the deceased person’s estate after taking into account

liabilities outstanding at the date of death and after deducting reliefs or exemptions and the nil rate

band or IHT threshold. The deduction is given for the full value of the liabilities due to the creditors

and not for the amount actually paid to them.

Certain assets attract reliefs meaning that the asset is wholly or partly not chargeable to IHT. These reliefs include Agricultural Property Relief (APR), Business Property Relief (BPR) and Woodlands Relief (WR).

Property situated outside the UK which belongs to or was settled into trust by a non-UK domiciled individual does not form part of the person’s estate in the UK as it is classed as “excluded property” and is not chargeable to IHT.

A liability secured on any property should first be set against that property. There are no specific provisions for the deduction of liabilities against property held in trust.

8.2 Provisions From 17 July 2013

A deduction for any liability will only be allowed to the extent it is repaid to the creditor, unless there

was a commercial reason for non-payment and it is not left unpaid under an arrangement to obtain a

tax advantage. Personal Representatives will have to ensure the debt is paid to secure a deduction

against the estate for IHT purposes.

No deduction will be available for a liability where it has been incurred either directly or indirectly to acquire ‘excluded property.’ However, providing certain conditions are met, if the excluded property has been sold and UK property acquired instead then the deduction may be allowed. If the liability has been incurred to purchase assets where BPR/APR or WR is available then the loan will be taken to reduce the value of those assets for IHT purposes rather than their value being relieved against the asset on which the liability is secured. Any BPR/APR or WR will be restricted to the value of

the asset net of the loan. Any excess liability after this set off will be allowed as a general deduction against the remainder of the estate subject to the to the extent that it is repaid under the other new regulations detailed above. For trusts, the new rules will apply to the trust (apart from the unpaid liabilities rule) when calculating the value of the trust for calculating the IHT due on each ten year anniversary of the trust being created.

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“Grandfathering” Provisions

Loans in existence prior to 6 April 2013 in relation to BPR/APR or WR property are not affected by these proposals but loans to acquire Excluded Property (whenever taken out) are subject to the new legislation.

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9 The New ATED ‘Mansion Tax’

Annual Tax on Enveloped Properties (ATED) was introduced on 6 April 2013. ATED applies where a UK residential property worth £2m or more is held in a corporate structure (an ‘envelope’) and this includes a partnership with a corporate member. ATED can apply to all companies whether UK or offshore. Hence where a large farmhouse or historic house is owned by a UK company, possibly under a long lease, ATED potentially applies. The good news is that there are a large number of reliefs available for property developers, property rental businesses, many farmhouses and house opening businesses. The bad news is that if the property value is over the ATED threshold of £2m, the return must be submitted and the relief claimed on an annual basis. The first ATED returns (including any claims for relief) were due by 1 October 2013 and the ATED payable by 31 October. The ATED amounts range from £15,000 for properties within the £2m to £5m band to £140,000 for properties worth over £20m. The values used are those on 1 April 2012 or acquisition date if later. The ATED amounts will increase but the bands themselves will not change. The ATED is most likely to be payable where a shareholder of a company occupies a UK property, or is a partner in a corporate partnership. It is expected that most companies owning large farmhouses or historic houses will be able to claim relief from ATED but the terms of the reliefs must be checked in detail in every case and the relief must be claimed. A further sting in the tail is the imposition of capital gains tax at 28% on the sale of properties where ATED has applied, although this only applies to the post 6 April 2013 gains. While it may be possible to ‘de-envelope’ so that the ATED is not payable, this may in itself trigger tax charges. It may also potentially expose the value of the UK property to inheritance tax. The 2014 Finance Bill contains a number of measures aimed at tackling the perceived tax avoidance opportunities presented by the use of corporate and other ‘envelopes’ for the purchase of residential property. These measures include the introduction of two new bands for ATED - £500,000 - £1m (with effect from 1 April 2016) with an annual tax charge of £3,500 and £1m - £2m (with effect from 1 April 2015) with a tax charge of £7,000. In addition to these proposed changes to ATED, the high SDLT rate of 15% will now apply to transactions where the purchase price exceeds £500,000 as opposed to £2m.

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APPENDIX I: Capital Allowances

The depreciation charge shown in a set of accounts, relating to the write down of a business’s fixed

assets, is not an allowable deduction for tax purposes. However, the tax legislation does allow a

deduction known as capital allowances, which is available to both breeders and trainers operating a

commercial business. Allowances are given on certain qualifying assets, with different rates of

allowance applying to different classes of asset. The tax legislation covering capital allowances is set

out in the Capital Allowances Act (CAA 2001), with important updates made to this legislation by the

Finance Act 2008, and subsequent Finance Acts.

Agricultural Buildings Allowances (ABA’s)

The breeder may have qualified for ABA on expenditure on the land, such as stables or fencing under

Sections 361 CAA 2001 but these allowances were phased out and eventually abolished from 6 April

2011 or 1 April 2011 for companies (Section 84 Finance Act 2008).

Plant and Machinery

Both breeders and trainers will generally qualify for capital allowances on items of plant and

machinery used in their business.

The question of what constitutes “plant and machinery” is the subject of much debate; in certain

cases resulting in legal proceedings. Consequently, the decision as to whether to claim capital

allowances on an item should be made after considering relevant case law and the particular

circumstances of the item in question.

The 1993 case of Jarrold v John Good and Sons Ltd established that an item must be “part of the

plant with which the business is carried on” rather than “part of the premises in which the business is

carried on” in order to qualify for plant and machinery allowances. Items such as equine swimming

pools, horse walkers, solariums and box heaters should be regarded as plant, however items such as

manèges, arenas and gallops (see below) may be questioned by HM Revenue & Customs. The case

also established that a moveable item would also be regarded as plant and therefore portable

schooling fences would also qualify for capital allowances.

All weather surfaces are now integral to training horses. The case of Shove v. Lingfield Park (1991)

Limited [2004] EWLA CIV 391 held that the all-weather surface was not plant. The case of Anchor

International VIRC [2003] VIXSC SP00354 held the opposite in relation to artificial sports surfaces.

Broadly, if the surface has an identity of its own and is not part of the structure, capital allowances

should be available. The issue is discussed at HMRC manuals CA21260.

Writing Down Allowances

General

All qualifying plant and machinery must be pooled together each year by adding the brought forward

balance of unrelieved expenditure to the current year additions which do not qualify for the Annual

Investment Allowance (see below) and subtracting the proceeds of any items disposed of. A writing

down allowance (WDA) of 18% is then available on the balance of expenditure in the pool at the year

end on a reducing balance basis. Prior to 6 April 2012 for individuals and partnerships, and 1 April

2012 for companies, the rate was 20%.

Integral Features

With the abolition and phasing out of Agricultural Buildings Allowance for expenditure after April 2008,

a new type of asset was created for capital allowance purposes, being Integral Features. These

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assets are maintained in a separate capital allowance pool and for any balance not covered by the

annual investment allowance (AIA) (see below) there is an annual writing down allowance on a

reducing balance basis of 8% (10% up to April 2012).

The integral feature categories are as follows:

Electrical systems including lighting systems

Cold water systems

Space or water heating systems, power systems for ventilation, air cooling or purification and any floor or ceiling comprised in such systems

Lifts, escalators and moving walkways

External solar shading

The integral features rate of 8% (10% up to April 2012) also applies to long-life assets (LLA). The LLA

treatment applies for expenditure of £100,000 or more in any year where the expected working life of

the asset, when new, is 25 years or more.

It is possible to allocate the AIA (see below) to integral features expenditure rather than plant and

machinery, such that if the total additions in a year are less than the AIA upper limit for the accounting

period then 100% up front relief is available on all the expenditure.

Enhanced Capital Allowances (ECA’s)

With some expenditure being re-classified to the 8% pool and the reduction in AIA (see below) and

the writing down allowance rate reduction, it is worthwhile looking at purchasing equipment which can

qualify for 100% ECA’s when carrying out refurbishment of the business plant and machinery.

ECA’s are available on assets which are energy efficient “green” plant and machinery such as

biomass heaters, heat exchangers, close control air conditioning systems etc. There is a list of the

particular brands and types of technology produced by the Government and any item on that list will

attract the enhanced 100% allowance.

Specialist firms can provide advice on refurbishments so that the expenditure attracts the highest

amount of up front capital allowances possible, but the specialists need to be involved from the point

the project is first considered so that any architects plans, building designs, working arrangements etc

incorporate the energy efficient plant and machinery from the outset. Obtaining a tax repayment from

losses (subject to the £50,000 or 25% of income if higher from 6 April 2013) arising due to a 100%

ECA claim will reduce the up-front cost to the business of the plant and machinery purchased. If the

equipment does not qualify for ECA treatment, only the annual writing down allowance will be

available.

With effect from April 2012 if there is any investment in qualifying energy saving plant or machinery

where either (i) a feed-in tariff payment is received in respect of electricity generated by it, or (ii) a

renewable heat incentive payment is received in respect of heat, gas or fuel produced by the plant or

machinery then the expenditure will not qualify for 100% ECA. Instead the plant or machinery will

attract the lower 8% reducing balance annual allowance for any excess not covered by the AIA as

detailed below.

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Annual Investment Allowance (AIA)

The timing of the purchase of equipment qualifying for AIAs is important, given frequent changes in

the legislation. Professional advice should be sought as early as possible to make sure AIAs are

maximised.

100% tax relief can be obtained on relevant capital expenditure on plant and machinery up to certain

levels in any accounting period. Relief is given via the annual investment allowance (AIA) which can

be claimed by individuals, partnerships and companies (but not partnerships of individuals and

companies, or by trustees).

AIA rates per annum are as follows.

Up to 1 April 2012 (or 6 April for unincorporated businesses) £100,000.

From 1 April 2012 (or 6 April) to 31 December 2012 £25,000.

From 1 January 2013 to 31 March 2015 (or 5 April 2015) £250,000.

Apportionment of the above amounts will be required to work out the available AIA in any accounting

period. This calculation can be complex depending on when the business accounting period ends

and when the expenditure is incurred.

Generally one AIA is available per business but if businesses are controlled by the same person or

the company is part of a group or under common control then only one AIA is available to split

between the related entities.

Cars

Expenditure on a vehicle qualifies for an 8% writing down allowance if the CO2 emissions exceed

160g/km. If the emissions are 160g/km or less then the expenditure is included in the 18% main pool.

Any private use of the vehicle will restrict the above claims. Legislation will be included in Finance Act

2013 to reduce the 160g/km threshold to 130g/km

100% First Year Allowance is available on cars with CO2 emissions of 110g/km or less for

expenditure from 31 March 2008 to 31 March2013.

For expenditure before 6 April 2009, a 20% allowance was available in respect of all cars, subject to

a £3,000 maximum cap. Any single asset car pools that were in existence before the rules changed

continue to be subject to the old rules under the transitional rules outlines in Paragraph 31 of

Schedule 11 FA 2009 until having to be transferred to the main pool in the first chargeable period to

end on or after 5 April 2014.

Any expensive cars purchased after 6 April 2009 are dealt with under the pooling provisions detailed

above, based on CO2 emissions.

Purchase of Second Hand Buildings with Fixtures

This is an area where the rules have changed significantly over recent years. It is now imperative that

the vendor and purchaser consider capital allowance claims as part of the purchase process so that

the purchase price is agreed and/or apportioned so that capital allowances are not lost.

A brief summary of the general provisions is included below but as each disposal will be different and

the advice given is likely to be change according to whether or not it is from the vendor’s or

purchaser’s point of view, it is recommended that the capital allowance situation is reviewed as early

as possible in the purchase process by both parties to the transaction. This would apply to both the

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purchaser of a training yard or stud. The larger the amount paid for fixtures, e.g. horse walkers,

portable fencing etc, the more important it becomes to ensure allowances are not lost.

Prior to 1/6 April 2012 (1st

April for Companies, 6 April for Individuals and Partnerships)

There is no requirement for agreed disposal values for fixtures between the vendor and the

purchaser.

The purchaser should seek to verify the amounts any previous owner has claimed on plant and

machinery and what disposal value has been included in the most recent owner’s capital allowance

calculation.

If no claim has been made for capital allowances then the purchase price can be apportioned on a

just and reasonable basis. In the event of a dispute, the apportionment could be referred to a tribunal

as long as both parties agreed.

If there was a previous owner who was required to bring in a disposal value (which cannot exceed the

original owner’s cost) any claim for capital allowances cannot exceed the disposal value of the most

recent previous owner required to bring a disposal value into account. However, if no previous owner

has claimed allowances since 24 July 1996 then a full apportionment of the acquisition price can be

applied regardless of original cost or whether an owner prior to 24 July 1996 claimed any capital

allowances.

Should the vendor have owned the building since before 1/6 April 2008 then they will not have been

able to claim integral features capital allowances and therefore any integral features in the building

will be new expenditure which the purchaser can claim and the purchase price can be apportioned to

allow this claim to be made. Where the sums are large enough to merit it, a specialist firm should

review relevant buildings to extract any relevant expenditure.

The vendor and purchaser can jointly elect for any value up to the full disposal value to be treated as

the capital allowance disposal value.

The position prior to 1/6 April 2012 requiring reference back to previous vendors, access to historical

records which may not be available etc meant that HMRC were concerned that there was scope for

double capital allowance claims to be made or differing apportioned values being shown on vendor’s

and purchaser’s tax computations. There is a risk that HMRC could enquire into tax returns made by

the vendors and purchasers if there was a discrepancy so this created uncertainty for the taxpayers

and could render them liable to interest and penalties

From 1/6 April 2014

There will be a mandatory pooling requirement for the vendor in order that the purchaser can

establish entitlement to claim capital allowances on fixtures acquired second hand where a previous

owner was able to claim capital allowances. This means that no allowances can be claimed on

fixtures acquired second-hand unless:

Neither the vendor nor a previous owner was able to claim capital allowances on the fixtures (so the mandatory pooling requirement cannot be met) or

The pooling condition is met i.e. the vendor has allocated the expenditure to a pool before the date of disposal or a first year allowance has been claimed in respect of that expenditure and either of the following two conditions is met;

1. Fixed Value – the vendor has been required to account for a fixed value where reached either

by a tribunal or by an election between the vendor and purchaser within two years of the date of

disposal/acquisition or the purchaser has obtained a written statement from the past owner (the

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most recent person able to pool the expenditure) that evidences the disposal value to be

brought into account; or

2. Disposal Value Statement – the vendor has been required to bring a disposal into account and

has made a written statement of that value to the purchaser within two years of the date of

disposal to the purchaser.

As pooling is only required prior to disposal there should not be any undue pressure for the owners to

pool expenditure within a minimum time after acquisition. However, a vendor who has pooled

expenditure and who is interested in certainty for tax would be advised to agree with the purchaser

the disposal value they will be required to account for to minimise any balancing allowance or risk of

enquiry.

In negotiating the sale price, the potential buyer who is interested in capital allowance claims may be

prepared to incur the vendor’s expenses in determining the pool, or they may want to reduce the sale

price if capital allowance claims cannot be made because the conditions detailed above have not

been met by the vendor. Alternatively the vendor may prefer to identify possible capital allowance

claims before sale to make the property more attractive and maximise the sale price.

After 1/6/ 2012 and up to 1/6 April 2014

Transitional rules apply for this period.

For the current owner the existing capital allowance rules apply with respect to fixtures and integral

features and there is only a pooling requirement if there is a desire to make a claim. There is no new

time limit within which that pooling has to be achieved.

The implications if a current owner wishes to sell their interest on or after 1 or 6 April 2012, and the

requirements to be met by the vendor and purchaser if the new purchaser wishes to claim capital

allowances on fixtures, are detailed below.

The purchaser will only be able to preserve the value of the allowances if:

a) The vendor did not pool the expenditure (in which case the apportionment process will apply) or

b) The vendor pooled the expenditure and either the fixed value or disposal value statement

requirements are met (see above) which will normally require an election to be made agreeing the qualifying expenditure or there will need to be recourse to a tribunal (NB unlike pre 1/6 April only one party needs to apply to the tribunal not both).

If the previous owner was unaware certain items could have been the subject of a capital allowance

claim prior to 1/6 April 2012 and they sell the building after 1/6 April 2012 the expenditure can be the

subject of a capital allowance claim by the purchaser. In addition if the building was owned by the

vendor on 1/6 April 2008 then the purchaser can apportion integral features from the purchase price

and make a claim in their own right.

From 1/6 April 2012, if a purchase is made from a vendor who was able to claim capital allowances

on fixtures

(i) because they had either pooled the expenditure before sale and neither the fixed value condition nor disposal value statement conditions are met; or

(ii) they have acquired the expenditure on or after 1/6 April 2014 and have not pooled the expenditure (or pooled the expenditure but not met the fixed value condition or disposal value statement condition), then neither the current nor any future owner will be able to claim allowances in respect of that expenditure.

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Other Points

If the capital allowance claim augments a loss which cannot be used in the current year or the

previous year, the trader can decide not to claim those extra allowances and effectively carry them

forward to be used when more value can be obtained from the allowances.

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APPENDIX II: Inheritance tax – General (IHT)

IHT replaced capital transfer tax with effect from 18 March 1986. It is levied on a chargeable estate

on death at 40% or on certain lifetime transfers at 20% (i.e. half the death rate). As a transfer to a UK

domiciled spouse or civil partner is exempt from IHT for married couples and civil partners, the tax

charge normally arises on the death of the surviving spouse/civil partner.

IHT is levied on a chronological and cumulative basis subject to a seven year time limit with

progressively higher rates of tax applying to each transfer. Gifts made within seven years of death are

chargeable subject to the following relief for tax due on the gifts as the result of the death of the

donor.

Years Between Death and Gift Tapering Relief

%

0-3 Nil

3-4 20

4-5 40

5-6 60

6-7 80

Lifetime transfers to individuals escape IHT so long as the donor survives for seven years after the

gift and does not continue to benefit from the asset or cash that was subject to the gift. Thus

significant savings can be made by passing wealth to dependants.

Lifetime transfers to a trust (excluding trusts for disabled persons) are chargeable lifetime transfers at

a rate of 20%, insofar as they exceed the nil rate band (currently £325,000). But they are

disregarded for IHT purposes after seven years so that it is possible to gift say £325,000 now, using

the nil rate band, and transfer further funds to a new trust in seven years’ time without incurring a tax

charge.

The IHT liability on a particular gift is based on the value of the chargeable transfer i.e. the amount by

which the value of the donor’s estate is reduced, after deducting any available exemptions and

reliefs.

Note that where the gift qualified for Business Property Relief or Agricultural Property Relief, broadly

it must continue to do so for the earlier of 7 years or the death of the donor or IHT may become

payable.

As far as chargeable lifetime gifts are concerned (i.e. gifts other than to individuals or a trust for

disabled persons) the available exemptions are as follows:

Annual exemption of £3,000

If the gifts in a particular year fall short of £3,000 the shortfall is carried forward one year and

added to the allowance for that year only. Even then the current year’s exemption must be

used in priority to any amount brought forward.

Gifts up to £250 per annum to any individual.

Gifts which are normal expenditure out of income are exempt as long as the donor can

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demonstrate that after making the gifts they retain sufficient income to maintain the same standard of living as they previously enjoyed. HMRC require detailed records to support claims for the normal expenditure out of income exemption.

Wedding and civil partnership gifts as follows:

each parent can give up to £5,000 to one of the parties to the marriage or civil partnership,

grandparents and great grandparents can each give up to £2,500 and

other friends and relatives can each give up to £1,000.

Transfers between UK domiciled spouses or civil partners.

There is no restriction on the amount of this exemption in relation to interspouse transfers

before 5 April 2013. Where the transferor is UK domiciled for IHT purposes, but the transferee

is not, only the first £55,000 is exempt. With effect from 6 April 2013, this limit is increased to

the IHT nil rate band in force at the time of transfer (this is currently £325,000). An election

can now be made to bring a non-domiciled scope into UK IHT and thus be eligible for the

unrestricted exemption.

Gifts to registered charities, certain listed non-profit making bodies, and certain gifts to political parties

are generally exempt from IHT without limit.

The last two categories of exemptions also apply to transfers on death.

It is possible to gift assets of historical, architectural or artistic significance in lieu of IHT liabilities. If it

is considered that assets may fall under this category there are guidance notes from HMRC and

relevant auction houses or specialist valuers will be able to advise if the asset(s) is (are) suitable.

Donors Retaining a Benefit

A gift must be absolute to ensure no adverse tax consequences. By absolute, we mean that the

donee must have full enjoyment of the asset to the virtual exclusion of the donor. If father gifts a

picture to his son, but on the condition the picture stays in the father’s house, the son is unlikely to

have full enjoyment of the picture to the virtual exclusion of his father. If the donor makes a gift and

reserves a benefit, there can be IHT or income tax charges as a result so professional advisors

should be consulted if a gift is contemplated so that all aspects of the gift are reviewed.

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APPENDIX III: Overseas Taxation – Statutory Residence and Dual Residence

1 Statutory Definition of Tax Residence

1.1 The Statutory Residence Test (SRT) is Effective from 6 April 2013

Residence is a fundamental concept as it defines the scope of an individual’s UK tax liability. There was previously no full legal definition of tax residence, meaning that the rules were unclear, complicated and seen as subjective. This created uncertainty for individuals in determining their residence status and that uncertainty could be a deterrent to businesses and individuals considering investing in the UK. Detailed consultation took place prior to the introduction of the SRT to try to ensure that clear objective tests would be used to give certainty in the vast majority of cases.

Statutory Residence Test (SRT)

The SRT is designed to provide simple, transparent and objective legislation to determine residence, taking into account the amount of time the individual spends in the UK and, in some cases, the connections they have with the UK. There is a distinction between Leavers (those who were UK resident in one or more of the previous three tax years) and Arrivers (those who were not UK resident in all of the previous three tax years).

The test is designed such that it is harder for Leavers to relinquish residence than it is for new Arrivers to acquire it, following the principle that residence should have an adhesive nature.

The SRT consists of three parts.

Automatic Overseas Test - If any of the conditions are met, the individual is non- UK resident for the year and there is no need to refer to the further tests. If this test does not apply, you move on to the next test.

Automatic UK Test - If any of the conditions are met, the individual is UK resident for the year and there is no need to refer to the further test. If this test does not apply, you move on to the next test.

Sufficient UK Ties Test - Day counts and various connecting factors are considered to determine residency status.

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1.2 Automatic Overseas Test

If met, this test provides certainty that a taxpayer is non-resident without the

need to take into account any UK connecting factors. This test conclusively

determines that an individual is non-resident in the UK for a tax year if they

meet any of the following conditions, namely they:

• were not resident in the UK in all of the previous three tax years and

they are present in the UK for fewer than 46 days in the current tax

year; or

• were resident in the UK in one or more of the previous three tax years

and they are present in the UK for fewer than 16 days in the current

tax year; or

• leave the UK to carry out full-time work abroad (employment or self-

employment), provided they are present in the UK for fewer than 91

days in the tax year and fewer than 31 days are spent working in the

UK in the tax year. On average they must spend at least 35 hours a

week working overseas. Any day in which more than three hours of

work are undertaken in the UK will count as a UK work day. Note that

time spent travelling in the UK, as well as training in the UK, count

towards hours worked where employer-funded or the costs are tax

deductible. The actual calculation is extremely complex and

‘significant breaks’ from overseas work can result in this test being

failed. Where an individual starts or ends overseas work in the tax

year this condition may not apply until the following tax year.

Further automatic overseas tests apply for the year of death. The

deceased will not be UK resident for the tax year in which their death

occurs, provided they spent fewer than 46 days in the UK during that

tax year, and they were resident in the UK for tax purposes for neither

of the two preceding tax years, or alternatively they were not resident

in the UK for tax purposes in the preceding tax year, and the tax

year before that was a split year. There is also an exemption if the

individual dies whilst working full time abroad and meets certain

conditions.

1.3 Automatic UK Test

Many individuals spend the majority of their time in the UK or have their home

and family life here. This test conclusively determines UK residence if the

individual meets any of the following conditions, namely they:

• are present in the UK for at least 183 days in a tax year; or

• have a home in the UK for more than 90 days, they spend at least 30

separate days (even for a short time) in that specific home in the tax year and, while the individual has that UK home, there is a period of 91 consecutive days (30 days of which fall in the tax year) throughout which they do not have an overseas home or, if they have one or more overseas homes in that 91 day period , they spend fewer than 30 separate days in each of them in the tax year. One does not need

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to consider whether a place qualifies as a ‘home’ unless 30 or more separate days or more have been spent there in the tax year; or

• work full-time work in the UK for a period of 365 days (one day of

which must fall in the tax year) and during that period there have been no significant breaks where for 31 days or more there are no days when more than three hours work are done in the UK. In addition during the tax year more than 75% of the total days for which more than three hours work are done are days when more than three hours of work are done in the UK.

It is important to note that in order to look at the UK home or full time UK work

tests outlined above, periods in both the tax year before and after the tax year in

question will need to be considered.

The above three tests also apply to deceased individuals. Additionally, there is a

fourth automatic UK test for the year of death where the deceased was UK

resident in each of the three preceding tax years by virtue of meeting one of the

automatic UK residence tests, and (assuming they were not resident in the UK

for the tax year of death and the preceding year was not a split year) they had a

home in the UK when they died and they did not spend a sufficient amount of

time in any overseas home prior to their death.

HMRC has published detailed guidance on how it will interpret these provisions at www.hmrc.gov.uk/international/rdr3.pdf.

1.4 Sufficient UK Ties Test: other ties and day counting

This will generally apply to individuals whose circumstances are more

complex. The more UK ties that an individual has the less time they

can spend in the UK if they are to remain non-resident. The following

ties are taken into account:

• UK resident family;

• accessible accommodation in the UK;

• substantive work in the UK (employment or self-employment);

• UK presence in the two previous tax years (spending more than 90

days in the UK in either of the previous two tax years); and

• more time in the UK than in any other single country (this tie is not applicable to Arrivers).

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The ties are linked with the day count as follows:

Arrivers Days spent in UK Impact of ties on residence status

Fewer than 46 days

Always non-resident

46 - 90 days

Resident if 4 ties (otherwise not resident)

91 – 120 days

Resident if 3 or more ties (otherwise not resident)

121 – 182 days

Resident if 2 or more ties (otherwise not resident)

183 days or more

Always resident

Leavers Days spent in UK Impact of ties on residence status

Fewer than 16 days

Always non-resident

16 - 45 days

Resident if 4 or more ties (otherwise not resident)

46 - 90 days

Resident if 3 or more ties (otherwise not resident)

91 – 120 days

Resident if 2 or more ties (otherwise not resident)

121 – 182 days

Resident if 1 or more ties (otherwise not resident)

183 days or more

Always resident

An individual has a UK resident family in the tax year if the individual’s spouse, civil partner or common law equivalent is resident in the UK or the individual has UK resident children under 18 with whom he spends time for 61 or more days in the UK. A child will not be resident for these purposes if their time in the UK is spent at an educational establishment and they spend no more than 20 days outside term time in the UK. (The child may still be UK resident). Term time has been defined to include half terms and other breaks within the school term.

An individual will have accessible UK accommodation if:

• the individual has a place to live in the UK;

• it is available to be used by them for a continuous period of at least 91 days

in a tax year; and

• the individual spends at least one night in that place during the tax year.

All accommodation will be treated in the same way regardless of the form of tenure or occupancy, including all types of employer provided accommodation. If the individual’s spouse, partner or minor child has accommodation in the UK it is only treated as available to the individual if they actually spend one night there in the tax year.

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There is an exemption for occupancy of property held by other specified other relatives unless the individual spends more than 15 nights there during the tax year. In addition HMRC has said that accommodation will not be treated as ‘available’ unless an individual would really be able to stay there for 91 days and so an ‘open invitation’ to stay should not count.

Where there is a gap of fewer than 16 days between periods in the tax year in which a particular place is available to the individual, that place will continue to be treated as if it were available to the individual during the gap. Hence hotel accommodation that is frequently used on a regular basis where there is not a gap between visits of more than 16 days over a 91 day period can give rise to an accommodation tie.

An individual will perform substantive work in the UK if they work in the UK for at least 40 days at some time in the tax year. Again a work day is where the individual does three hours or more of work in the UK.

2 Split Years

New rules have replaced the previous extra-statutory concessions to treat a tax year as being split into UK and overseas periods for a person who:

• loses UK residence by virtue of working full-time abroad, or as a result of

their partner working full-time abroad;

• ceases to have a UK home and establishes their normal home in a country

outside the UK within 6 months of departure and spends fewer than 16 days

in the UK after they cease to have a UK home;

• becomes resident in the UK by virtue of their only home being in the UK;

• becomes resident by starting full-time work in the UK;

• becomes resident by ceasing full-time work overseas or as a result of their

partner ceasing full-time work abroad (although this scenario is ignored in

some specified cases if they have been non UK resident for the previous 5

tax years);

• becomes resident by acquiring a UK home during the year and remains UK

resident the following year.

Several of these cases may apply to an individual leaving or coming to the UK and the legislation then prescribes which case is to have precedence. In general the legislation operates to ensure that the ‘overseas period’ is the shortest one under any of the applicable cases.

These rules are complex and there are also detailed conditions that must be satisfied for both the UK and overseas part of the tax year and often the preceding or subsequent tax year as well.

Note that a tax year will not be treated as split where an individual’s residence status changes due to a variation in the number of ties under the Sufficient UK Ties Test.

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3 Exceptional Circumstances

Up to 60 days may be spent in the UK in a tax year as a result of national or local emergencies such as war, civil unrest or natural disasters or sudden or life-threatening illness or injury. This will apply for most of the day counting tests including the 183 day test for automatic UK residence which represents a relaxation of the previous position.

Exceptional circumstances do not include strikes, fog delays and other transport issues according to HMRC guidance.

4 Anti-avoidance Provisions

There are anti-avoidance provisions similar to the one previously applicable to capital gains and offshore income gains which also continue to apply. These new provisions counteract the loss of tax where individuals go non-resident for short periods and then receive a large amount of income which previously accrued during periods of UK residence. In particular, this is designed to counter distributions from closely controlled companies, chargeable event gains, pension payments, disguised remuneration, release of loans to participators etc.

5 Conclusion

Whilst the new SRT gives increased certainty to many individuals and allows some to spend longer periods in the UK than before, the rules are extremely complex. A great deal of record keeping will be required from an individual in order to support their resident status in many situations. As individuals lead increasingly mobile lives identifying the countries where they work, live and have their homes becomes more difficult.

Further guidance can be obtained from the following link:

http://www.hmrc.gov.uk/cnr/rdr1.pdf

6 Transitional Rules

There is a transitional rule which applies only for those parts of the Tests where the individual needs to know what their residence status was in one or more of the three years prior to the introduction of the Tests. Taxpayers will be able to elect that the new rules will apply to earlier years solely in order for them to determine their residence in future years under the SRT.

7 Abolition of Ordinary Residence

The concept of ordinary residence for tax (but not National Insurance) purposes has been abolished with effect from 6 April 2013. However Overseas Workday Relief (OWR) is now on a statutory footing and apply only to non-UK domiciled individuals after 6 April 2013. The new rules have been widened to include those arriving in the UK who had not been UK resident in the three previous tax years even if they intend to stay longer than three years. OWR applies to the tax year of arrival and the following two tax years where the overseas earnings are not remitted to the UK. A link to the guidance notes is given below.

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http://www.hmrc.gov.uk/international/rdr4.pdf

8 Prior to 6 April 2013

Before the SRT in the years up to and including the year to 5 April 2013, the residence rules were different and therefore, separate advice should be taken in this regard to ensure correct disclosures of income and gains are made to HM Revenue and Customs.

9 Dual Residence

The new SRT or indeed the old rules on residence might make an individual resident in two or more countries i.e. they may have “dual residence”. To avoid double taxation, the residence Article in modern double taxation agreements (DTA) often provides `tie-breaker' rules for determining residence, for the purposes of the agreement, where an individual is resident in both countries under their respective domestic tax laws. The `tie-breaker' rules consist of a series of tests to be applied successively until residence for the purposes of the agreement is allocated to one State (i.e. country) or the other. In other words, once a test is conclusive it is unnecessary to apply subsequent tests. It is essential to refer to the text of the DTA in order to see how the individual will be treated. 9.1. Generally the Tests Appear in the Following Order Permanent Home

An individual is a resident of the State in which they have a permanent home available to them (though not necessarily owned by them). If they have a permanent home available to them in both States it is necessary to look at the next test:

Centre of Vital Interests

An individual is a resident of the State to which their 'personal and economic relations' (a wide expression intended to cover the full range of social, domestic, financial, political and cultural links and relationships) are closer. If it is not possible to determine this, or they have no permanent home available in either State, then it is necessary to look at the next test:

Habitual Abode

An individual is a resident of the State in which they have their habitual abode. If they have a habitual abode in both States or in neither, then the final test is:

9.2 Nationality

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An individual is a resident of the State of which they are a national. Finally, since all these tests may in theory be inconclusive (even the last, since a person may have dual nationality or may be a national of neither state) there is normally provision for the two States to negotiate who should have taxing rights and any double taxation relief. If the two States do not have this model of a tie breaker clause then reference will need to be made to any agreements in place to determine the exact status of the dual resident person in each State in terms of how they will be taxed and any double taxation relief. It is recommended that professional advice is taken in both countries to ensure compliance with the tax regimes.

9.3 The Effect of Dual Residence If the tie-breaker rules allocate residence for the purposes of an agreement to the other country the effect on United Kingdom liability is potentially significant.

An individual who is 'treaty resident' in the other country is entitled to make claims to relief from United Kingdom tax as provided for under the agreement on the basis that they are a `resident of' the other State. As a result:

Income or a gain of a type which is dealt with in the agreement and which arises in the other State is always exempt from United Kingdom tax.

Income arising in other overseas territories is exempt if the agreement has an ‘other income’ Article.

Only UK source income can be taxed in the UK and then only to the extent that such income can be taxed in the hands of a sole resident of the other State. Special rules may however apply where any income (including foreign income) is connected with a business or profession which the individual carries on in the UK.

It may be possible to exclude most of an individual’s overseas income and gains from the UK without having to pay the RBC if they are treaty resident elsewhere. In addition, such excluded income and gains may be able to be remitted to the UK. This is a complex area and advice should be taken.

Although the agreement overrides some of the normal consequences of being a United Kingdom resident, it does not, in the case of an individual, override the fact of UK residence itself for purely domestic law purposes. Even though an individual may be resident for agreement purposes elsewhere, they (as a resident of the United Kingdom for United Kingdom tax purposes) still have to complete returns and fulfil any similar obligations imposed by the UK tax legislation.

They will remain entitled to any personal allowances which may be due on account of their UK residence status.

10 Income Tax and Capital Gains Tax (for non UK domiciled taxpayers)

All non-domiciled tax payers have the option to pay UK tax on the arising basis (worldwide income and gains) or on the ‘remittance basis’ for foreign income and gains.

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10.1 Resident for less than 7 of the previous 9 tax years (and non UK

domiciled) If the remittance basis is claimed, tax is charged on UK income (or gains) on an arising basis and on non-UK income (or gains) as they are remitted to the UK. However, in most cases the income tax personal allowance and capital gains tax exemption will be lost if the remittance basis is claimed. 10.2 Resident for more than 7 years out of the previous 9 tax years, but less

than 12 years out of the last 14 tax years (and non UK domiciled) As above plus Remittance Basis Charge (RBC) of £30,000 or the option to be taxed on worldwide income and gains. However, please note that the RBC does not apply to minors who were under 18 throughout the tax year. 10.3 Resident in the UK for more than 12 tax years out of the previous 14 tax

years (and non UK domiciled) As above plus Remittance Basis Charge (RBC) of £50,000 or the option to be taxed on worldwide income and gains. However, please note that the RBC does not apply to minors who were under 18 throughout the tax year.

11 General Points for Non UK Domiciled Taxpayers There are generous transitional rules for non-UK domiciled taxpayers in relation to untaxed pre April 2008 income and interests in and distributions from offshore trusts. There are complex rules as regards what constitutes a remittance to the UK both in terms of assets and funds from offshore accounts. Professional advice should always be sought. There are HMRC guidance notes concerning the above but it is recommended that professional advice is sought prior to remitting funds to the UK or when preparing any tax returns. 11.1 Business Investment Relief (BIR) BIR took effect from April 2012 which means that an investment in a company with trading activity in the UK, which can include investing in property in the UK on a commercial basis, should not be regarded as a taxable remittance. There are a number of conditions attaching to this provision so anyone wishing to explore the possibility of using this relief should take specialist advice to ensure that they do not breach any rules that the company is investing in a qualifying business and that time limits are adhered to. The main conditions for the individual qualifying for relief are as detailed below:

The investment (which may be in the form of shares or a loan) must be made in a qualifying company that meets the eligibility conditions for relief.

The investment must be made within 45 days of foreign income and gains being brought to the UK.

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No “relevant person” is able to obtain benefits either indirectly or directly that are attributable to the investment.

The claim for relief must be made on the Self Assessment tax return for the year in which the investment is made.

When the investment is disposed of, the proceeds, up to the amount of the investment, must be taken offshore or re-invested in another qualifying investment within 45 days of the disposal. There are other ‘events’ which can also require the disposal of the investment if a remittance is to be avoided.

Clearance can be sought in advance from HMRC as to whether a particular investment will qualify for BIR. 11.2 UK Inheritance Tax Where an individual is non UK domiciled, Inheritance Tax (IHT) is chargeable on assets situated in the UK only. However, a non-domiciled UK resident will be treated as UK domiciled for IHT purposes if they have been resident in the UK for income tax purposes for 17 out of the last 20 years. This means that their worldwide assets would then be liable to UK IHT. Non domiciled individuals should seek specialist advice before investing in or arriving in the UK. In addition, before the foreign domiciliary comes to the UK it is recommended that the “situs” (where the asset is considered to be sited for tax purposes) of any asset is reviewed so that it is retained in the most appropriate place from a tax point of view. It may also be appropriate to consider establishing offshore trusts whilst non UK domiciled. The 2013 Finance Act introduced changes to the deductibility of some debts for IHT purposes and so advice should be taken on this issue. In addition HMRC have changed their view as to the situs of loans to UK residents which may mean they are now treated as UK assets and potentially liable to UK IHT. 11.3 Double Taxation Agreements The UK has negotiated agreements with a significant number of countries which determine which country has the right to tax particular sources of income, capital gains or the estates of deceased persons. These can also determine if tax paid in one country can be offset against taxes paid in another or vice versa. Therefore, as part of a review of a non-domiciliary’s UK tax position it will also be necessary to consider any relevant double taxation agreements to ensure that any exemptions or tax set offs are claimed. Bloodstock breeding The UK tax treatment of bloodstock breeding activities is explained in detail in Chapter 1. The main points of relevance to a non-domiciled UK resident are:

a. Tax losses may be used to shelter remittances of foreign source income and capital gains from UK tax if the legislation permits such a set off either against income or capital gains. Alternatively they may be offset against UK source income and capital gains. However, the effect of the cap on available loss relief

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(section 1.7 refers) should be taken into account in deciding whether to remit capital in any tax year.

b. A capital gain on the disposal of UK land or other assets used and owned by a

non-resident in their UK trade will be liable to UK capital gains tax. Entrepreneurs’ Relief may however be available.

c. As mentioned above, UK IHT applies to UK assets only unless the deemed

domicile rule applies. Bloodstock and land in the UK which are owned through a non-UK incorporated company may avoid the charge to IHT.

d. If the non-direct ownership of residential property is contemplated where

ownership would be via a company then the higher rates of Stamp Duty Land Tax (SDLT) charges on residential property for in excess of £2m held by “non-natural” persons should be considered before the property is purchased. In addition the new Annual Tax on Enveloped Dwellings (ATED) charges on such properties should also be considered.

Stallions The UK tax treatment of income from stallions and stallion syndicate shares is explained in Chapter 2. The main points of relevance to a UK resident and non-domiciled individual are:

a. A gain on the sale of a colt which is being raced and is not used for breeding purposes should not be liable to UK tax. This applies for UK residents whether non UK domiciled or not.

b. A gain on the sale of a stallion which is at stud is normally included in the

calculation of the profit/loss of the breeding activity, hence liable to UK income tax.

c. Nomination fees from a stallion standing at stud in the UK or from a share in a

UK stallion syndicate, are generally regarded as UK source income and liable to UK tax. Care must be taken where a foreign national has substantial breeding activities outside the UK.

d. A gain on the sale of a share in a UK stallion syndicate which is held as an

investment rather than as part of the stock in trade of a breeding activity is tax-free in the UK.

Leasing racehorses Where a breeder does not want to sell a horse that is about to commence its racing career, but at the same time does not want to incur the costs of racing the horse, he may decide to lease the horse to another individual/company. This is a fairly common arrangement. The terms of the lease would usually be such that there would be no rents paid under the lease, and all the expenses and prize money of the racing accrue to the lessee. Any racing profits would be tax free since racing is not a taxable activity. 11.4 Foreign Exchange Gains or Losses There are various forms of leases which can be arranged between the owner of the horse (lessor) and the lessee. All leases need to be registered with the British Horseracing Authority under the Rules of Racing. A form of lease can either be

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obtained from the British Horseracing Authority or a legal document can be drawn up which will clearly define the relationship between the parties so that there can be no confusion at a later time. The leasing arrangement which may be required will depend upon the tax position of the parties and the likely future profitability of the activity. 11.5 Foreign Exchange Gains or Losses With effect from 6 April 2012, any capital gains or losses arising for individuals on foreign currency bank accounts will not be subject to capital gains tax and the losses will not be relievable against other capital gains. This is a useful relaxation in the regulations for foreign currency bank accounts where calculations of gains and losses could be extremely complex. However, for businesses, any transactions in foreign currencies either from Sterling to the foreign currency, vice versa or from foreign currency to foreign currency will not necessarily be subject to the same rules or the same exemptions. The precise way that foreign currency will need to be converted to appear in a set of accounts will be determined by the form of the business entity (company, sole trade, partnership or LLP) and the need to apply the appropriate accounting standard consistently. Income or corporation tax may apply as appropriate.

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APPENDIX IV: Breeding and Commerciality

1 Background

Breeding thoroughbreds can be a business of feast or famine, giving rise to an irregular

pattern of sales and profitability. Some breeders can make profits every year, some every five

or six years and others breed horses as a hobby and so do not expect to ever make a profit.

The overwhelming aim for any business should be to make profits. However it is recognised

that losses are made at some stages in many businesses therefore income tax loss relief is

available to set trading losses against other taxable income or capital gains where a business

with a profit motive makes a loss in any year. However loss relief is only available where the

business is run with a view to profit and in a way in which it can actually make a profit at some

time in the future. The legislation in Section 66(2) ITA 2007, as shown below, sets out the

parameters.

The trade is commercial if it is carried on throughout the basis period for the tax year —

(a) on a commercial basis, and

(b) with a view to the realisation of profits of trade. This should be carried out in such a way

that profits of the trade could reasonably be expected to be made in the basis period or

within a reasonable time afterwards.

Businesses which make a loss can always opt to carry this forward against future profits, even

if sideways loss relief (against general income) has been denied. This is confirmed in HMRC’s

Business Income Manual.

In deciding whether a stud is commercial or not, the first stage is to decide whether there is a

trade at all.

Taxation Treatment as a Trade Rather Than a Hobby

HM Revenue & Customs’ decision as to whether a business is classified as a bona fide trade

or as a hobby is fundamental to the tax position of many in the bloodstock industry. If it is

deemed that a hobby rather than a trade is being carried on, no relief for losses suffered will

be available against other income. More information on the Badges of Trade can be found in

HMRC Business Income Manual at Para B117 20205. Guidance can also be found in Marson

v Morton [1986] STC 463.

The decision as to whether a trade is being carried on will be based on whether the enterprise

bears the “badges of trade”, as discussed below. If a trade is being carried on then, as above,

s64(2)(a) ITA 2007 will restrict loss relief where it is not carried on a commercial basis.

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2 Badges of Trade

The issue of badges of trade was addressed by the Royal Commission on Taxation of Profits

and Income in its report in 1955 and, although bloodstock breeding and racing is a somewhat

specialised industry, the general principles are worth bearing in mind should you need to

convince HM Revenue & Customs that the activity should be treated as a taxable trade. In the

report the major relevant factors which have a bearing on the “badges of trade” are as follows:

a) The subject matter of the realisation. While any form of tangible property can be traded,

certain items are only rarely held as an investment. Property which does not produce

income or personal enjoyment is more likely to be (but not necessarily) traded property.

As the stallion or share in a syndicated stallion can be a good income-producing asset,

HM Revenue & Customs could argue that it is being held as an investment and not

trading stock. As the owner of a racehorse is likely to derive personal enjoyment from

the activity, but is unlikely to realise profits, HM Revenue & Customs have traditionally

argued that racing is a hobby and not a taxable trade. However, breeders who sell

foals and yearlings on a regular basis are more likely to be considered to be trading.

b) The length of the period of ownership. Normally property which is traded will be held

short-term whereas an investment is normally acquired for long term income and

capital growth. It should be stressed to HM Revenue & Customs that bloodstock

breeding is a high risk, long-term venture and cannot be assessed only on the results

of the first year or so.

c) The frequency or number of similar transactions by the same person. The larger the

number of horses owned, the stronger the argument will be that a trade is being carried

on. If only one brood mare is owned, then the Inspector is likely to argue that a hobby

is being enjoyed, whereas if the business encompasses a number of mares, stallions

and stallion shares, then they are more likely to be persuaded that there is a bona fide

trade.

d) Supplementary work undertaken in connection with the asset. Generally where

supplementary work is undertaken on an asset it will normally be regarded as a trading

asset. For a genuine bloodstock breeder, the brood mare will need constant attention

and the breeder will, where they own their own stud farm, normally (but not always)

carry out work on the brood mare.

e) The reason for the sale. As mentioned above, the length of ownership of an asset is

important in determining whether it is trading stock or an investment. However, an

asset that was initially acquired for the long term as an investment may have to be sold

at an earlier date due to the need for emergency finance. Similarly, an item acquired as

stock may be held for longer than anticipated due to the trader being unable to sell it

and hence may be treated as an investment. The reason for a sale should therefore be

considered alongside the other factors. Please note brood mares are shown as ‘stock’

in the accounts even though they are the ‘production line’.

f) Motive. This is perhaps the most important factor. In certain cases, it will be clear that

the motive of the owner was to trade or alternatively to hold the horse as an

investment. However, there will be many times when the distinction is not so clear cut.

In such cases, evidence supporting the motive of the owner when the horse was

acquired will be extremely important. For example, if it can be shown that a share in a

syndicated stallion was acquired with a view to covering a brood mare at the stud farm

and that arrangements were made for the brood mare to visit the stallion, then HMRC

should accept that the share is stock even if, for some reason, the brood mare was

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unable to visit the stallion. It is the purpose at the time of the transaction, e.g. the

acquisition of the syndicate share, which is important.

3 Running the Business Commercially

Whether a business is being run commercially can be subjective. Some breeders make

profits with only one mare whilst others with 15 mares will never make a profit.

Clearly, there are no hard and fast rules in deciding whether a business is commercial; the

judgement is qualitative rather than quantitative. There are no hard and fast rules on the

minimum number of mares, but in an enquiry HMRC will consider whether the business is run

on a model such that it can make a profit.

The breeder must be aware that they have to organise matters in a business-like fashion and

in a way that can make money in the future. The starting point is breeding what the market

wants. Bad mares cost just as much to keep as good mares, but they don’t produce profitable

foals regardless of how much is spent on the nomination.

Generally, people starting out in business will have a commercially focused business plan

considering likely sales, inputs, finance and an estimate of how long will be required to

achieve a positive return. Breeders should take the same approach.

For a breeder, the business plan should consider the cost of:

Considering what the market wants

Acquiring stock mares

Nominations

Keeping mares – will this be at home or will they be boarded?

Keeping foals once weaned – is there somewhere for them to go where they can be wintered fairly cheaply or are they going to have to be kept at great expense? Does the breeder have the expertise to look after them themselves or are they going to have to employ staff?

Preparing the yearlings for sale

Overheads

Business plans should be regularly updated.

HMRC accepts that breeders will have problems; foals galloping through fences, losing mares

with colic and so on. Losses caused by such events do not mean that the trade is not being

run commercially. What HMRC wants to see is that the business is being run in a way in

which it can make a profit. (BIM 75710)

HMRC’s views on commerciality are set out in the HMRC BIM Para 75705. In Para 75615 the

Manual quotes the Chancellor at the time the restriction on relief was introduced in 1960,

Derick Heathcoat-Amory:

"We are after the extreme cases in which expenditure very greatly exceeds income or any

possible income which can ever be made and in which, however long the period, no degree of

profitability can ever be reached."

An example of a case where the taxpayer was regarded as not commercial is detailed below.

Goodman Equine Limited – [2012] UKFTT 565 (TC)

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This was a VAT case heard by the First Tier Tribunal. A report of the case can be found using

the above reference in the UKFTT reports.

This case did not relate to the Thoroughbred industry, but to owning sports horses.

The Tribunal decided that the company was not a business for the purposes of VAT, however

the decision has implications for other businesses.

Factors taken into account were as follows:

The FTT had regard for the badges of trade whilst accepting that neither the scale nor profitability of the company’s activities were relevant considerations.

Whether the company constituted “a serious undertaking earnestly pursued”.

When no horse sales had been made to date and a good offer was made for a horse that the company did not take up the offer despite the company’s financial instability.

If there was a reasonable continuity of activity rather than isolated, intermittent “business” activities. It was considered that continuous activities by the director with no identifiable business outcome from those activities were insufficient to meet the test.

If the company was conducted in accordance with sound and recognised business principles. In this case the company was trading at a loss and could not continue without reliance on the Director’s financial support.

The director had transferred horses without any re-sale value to the company balance sheet which was not in accordance with recognised business principles.

Whether the activities of the company were of a kind undertaken with a view to a profit given that no horse sales had been made over the relevant period and the company did not take advantage of offers to buy horses when made. It was considered that the company activities were more closely connected to the “pleasure and social enjoyment of equestrian activities” by the director.

Could the company’s activities be described as preparatory to trade or undertaken with the intention to trade.

4 Demonstrating Potential Profitability

Provided the breeder can demonstrate profits can be made some time in the future, then they will

be trading commercially. They have to be able to show that they are breeding horses because

they want to make money, and are doing so in a way which can make money. How do they

demonstrate this? These are some factors which should be considered to be used as evidence:

Initial work done on the costings of producing a foal to the point of sale

Consideration of suitable commercial mares

Suitable matings at a commercial cost

Business plan

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Consider the 2011 Book 3 sale. The median price for a yearling sold in this sale was 5,500

guineas. However, the basic cost of rearing a foal to sell as a yearling is £5,850, assuming keep

at £75 per week over 18 months. Moreover, the keep fee does not take into account the

nomination fee, sales preparation costs or any other expenses. Therefore, it is very difficult for a

commercial breeder to justify keeping mares whose progeny consistently make Book 3. On the

other hand, the median for a yearling in Book 2 was 30,000 guineas, so at that stage the business

does start to look as though it is capable of making a profit.

Commerciality can be shown through a variety of factors. For example, does the breeder sell all

their good foals, or do they retain them to race? Consistent sales present a picture of someone

trying to maintain cash flow. The following points are worth bearing in mind when trying to

demonstrate commerciality.

Consideration of commercial matings The commercial breeder will show that matings represent value for money

Overheads These have to be kept under control. For example, are there too many employees? Could

any financing costs be structured more efficiently? If boarded, are the mares at the most cost

efficient stud?

Business plans Is there an up-to-date business plan? Business plans can be a clear indicator of a

commercially run business, especially where they are regularly updated.

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Appendix V: HMRC Business Income Manual “Guidance on Sponsorship”

BIM42555 Specific Deductions: advertising expenses: sponsorship. Sponsorship is a way for businesses to obtain the commercial benefit of bringing their name, products or services to public attention. 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. Although often associated with sporting or cultural events, business sponsorship is not confined to those areas. For example, there is growing expenditure on ‘product placement’ – paying to ensure that a particular product or service features prominently in a successful television series or film. Sports clubs and cultural venues offer a range of options for potential sponsors. These include:

corporate sponsorship packages, often advertised on the club or venue website

sponsoring individual productions, players or races

long term deals such as sponsoring a football club. These packages may include both advertising (for example in the event’s programme, on clothing, at the venue, through to the name of the event) and hospitality. The hospitality may simply be a certain number of tickets or it may include meals or access to hospitality boxes. Sponsorship costs are allowable in arriving at the profits of a trade or profession except where they are:

capital expenditure,

expenditure not made wholly and exclusively for business purposes, or

expenditure which is specifically disallowed (such as any entertaining expenditure – see BIM45000 onwards).

Capital Expenditure Sponsorship costs may be disallowable as capital expenditure (see BIM35000 onwards) if, for example

a contribution to a permanent exhibition provides an enduring benefit, or

the sponsor buys capital assets such as racehorses or cars. Where enduring benefit takes the form of an intangible asset and the sponsor is incorporated, relief may be available under the Intangible Assets regime. (See BIM 35501). Relief will not be available under the Intangible Assets regime where the intangible asset is linked to a right over land or over a tangible, moveable property. See CIRD25030 for further guidance on this point.

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Where the sponsor acquires capital assets such as horses or cars they may be able to claim Capital Allowances. Guidance on the type of asset that qualifies for relief can be found in the Capital Allowances Manual. Guidance on animals as plant is at CA211220. Wholly & Exclusively Sponsorship costs are subject to the ‘wholly and exclusively for business purposes’ test in CTA 2009 s 53(1) and ITTOIA05/S34. This means that if there is a non-business purpose to the sponsorship (even if there is also a business purpose) no allowance is due. See BIM38210 for guidance on purposes. The purpose or purposes of expenditure is a question of fact to be determined by the Commissioners, in cases of dispute. Further guidance on the type of evidence to look for is at BIM42565. For an example of where the Special Commissioners found that payments of sponsorship were not paid wholly & exclusively for the purposes of the trade, see the discussion of Executive Network v O’Connor SpC56 at BIM42565. BIM42560 Specific Deductions: advertising expenses: sponsorship: entertaining and benefits in kind. In addition to the advertising, the sponsor may receive other benefits such as tickets to the event or access to hospitality boxes. For example, a trader may enter a corporate sponsorship package with a theatre. The package includes advertising in the programme and in the foyer. In addition the package includes tickets and meals. Although the theatre may emphasise the opportunities for business entertaining in its advertisements for Sponsorship, the trader may have no use for these tickets or may use the tickets to entertain staff or guests. It is important to establish the facts of the particular case. The type of evidence to look for would include any business plan relating to the sponsorship, minutes of directors meetings and evidence as to how the facilities were actually used. Entertaining Where the sponsorship costs include an element of hospitality, this is disallowable under the rules of BIM45055. Where a single sum is paid for a package that includes both advertising and hospitality, then the sum should be apportioned (see BIM37007). You should look to see if the sponsored party also offers elements of the package as this will provide evidence as to the value of the different parts of the package. Employment-Related Benefits in Kind Sponsorship may result in a taxable benefit for employees, including directors. For example, the controlling director or a company has an existing personal interest in motor racing and is a member of a racing team. The director decides that the company will sponsor that team.

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The company pays bills for maintaining the team’s cars. You should consider whether the expenditure gives rise to benefits taxable on the director as part of their remuneration. See EIM20001 for further guidance on employment-related benefits. Where corporate hospitality is provided to an employee or director by reason of their employment it may represent an employment-related benefit (EIM21729). If expenditure is incurred as part of the remuneration package then it should be considered as part of the cost of employing the person concerned. BIM42565 Specific Deductions: advertising expenses: sponsorship: purpose. To be an allowable expense the cost of sponsorship must be incurred wholly and exclusively for the purposes of the trade or profession. Commercial sponsorship is rarely limited to paying over funds to the sponsored activity. The sponsorship will be part of a targeted marketing scheme. When significant sums are involved, the payer will look to maximum exploitation of the sponsorship vehicle. The following principles need to be taken into account in deciding whether the sponsorship was paid wholly and exclusively for the purposes of the trade:

To find out whether the payment was made for the purposes of the taxpayer’s trade it is necessary to discover the taxpayer’s object in making the payment.

The general rule is that establishing the object behind making the payment involves an inquiry into the taxpayer’s subjective intentions at the time of the payment.

The taxpayer’s subjective intentions are not limited to the conscious motives which were in the taxpayer’s mind at the time of the payment.

The ‘purposes of the trade’ means ‘to serve the purposes of the trade’.

The “purposes of the trade are not the same as “the purposes of the taxpayer”.

The “purposes of the trade” does not mean ‘for the benefit of the taxpayer’.

The purpose for making the payment is not the same as the effect of the payment.

A payment may be made exclusively for the purposes of the trade even though it also secures a private benefit. This will be the case if the securing of the private benefit was not the object of the payment but merely a consequential and incidental effect of the payment.

Some consequences are so inevitably and inextricably involved in the payment that unless merely incidental they must be taken to be a purpose for which the payment was made.

These principles are drawn from the judgement of Miller LJ in Vodafone Cellular & Others v Shaw [1997] 69TC376 at page 436G to 437H. Further information on this case can be found at BIM38220. Typically (but not exclusively) there may be a non-business purpose where

The sponsored person is a relative or close friend of the business proprietor or controlling director, or

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The business proprietor or controlling director has a personal involvement in the sponsored activity (such involvement often pre-existing the sponsorship).

The purpose or purposes of expenditure is ultimately a question of fact to be determined by the Commissioners. It is important to obtain and review the contemporary factual evidence. The type of evidence to look for includes (but is not limited to):

details of negotiations, including correspondence and contracts;

how did they become aware of that particular event/person?

why was it decided to sponsor that particular event/person?

what alternatives were considered and why were they rejected?

a copy of the business plan that is usually prepared in commercial sponsorship cases;

copies of any material prepared by the person/entity seeking sponsorship;

details of how the sponsorship was intended to bring the name of the business or its produces before the intended target audience (including how prominent are any adverts);

how the sponsorship is exploited in terms of point of sale publicity, the local media, or other available avenues?

The arrangements to assess and refine the effect of the sponsorship. The Internet is a useful additional source of information.

What is said about the sponsorship on the web-site of the business?

Is there any information on general sites about that sort of activity?

Do they show evidence of previous involvement in the sport or activity?

What does the person/entity sponsored have to say about their sponsors? A demonstrable lack of commerciality in the transaction may indicate a non-trade purpose. However, this requires more than simply poor commercial judgement. A sponsor may make a poor choice of vehicle for sponsorship, but that decision may still have been taken purely for business purposes. A bad decision made with purely commercial motives, is still a decision made for the purposes of the trade. Lord Reid makes the point in Ransom v Higgs (50TC1 at page 82) that: “If a trader is actuated by none but commercial motives the Revenue cannot merely say that he has paid too much. He may have been foolish or he may have had what could be fairly regarded as a good commercial reason for paying too much.” The type of evidence that may show a demonstrable lack of commerciality includes:

Sponsoring a relative or close friend,

Paying as much as the sponsored party wants without negotiation of consideration,

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Not appearing to have regard to the commercial effect of the activity sponsored, for example, a small local business operating solely in the Newcastle-upon-Tyne area of sponsoring an event in Plymouth,

Not considering any other option. In particular where the parties are connected you should pay close attention to commerciality of the sponsorship. The case of Executive Network (Consultants) Ltd v O’Connor, [1996] SpC56 (See BIM37970), is an example of where the Special Commissioner found that sponsorship payments were not made wholly & exclusively for the purposes of the trade. The Special Commissioner found that the fact that the amount paid was determined by the amount that the sponsored party needed. This showed that the purpose of the payment was at least partly that of the sponsored party. As the test is the purpose of the expenditure, the success (or otherwise) of the sponsorship (either in terms of generating commensurately more income or the success of the sponsored person/entity in their chosen field of endeavour) is not by itself a relevant factor. Where the sponsorship fails to generate commensurately more sales it is reasonable to expect, in a purely commercial arrangement, that steps will be taken to improve matters. Failure to identify and take the necessary measure may indicate that the arrangement is uncommercial. The type of evidence that may show a lack of commerciality includes:

No review of the effect on the trade of the sponsorship

The review only considers the success of the sponsored party, not the effect on the trade. Novices The fact that a trader chooses to sponsor a novice does not, of itself, mean that they have not acted from a commercial motive. Novice sportspersons do seek commercial sponsorship. The trader may be able to demonstrate that they wanted their name and brand to be associated with a rising star and obtain publicity as a result. If this is their only purpose then the sponsorship is allowable. If the novice sportsperson is a relative or associate of the proprietor/director(s), then there may also be a non-business purpose to the sponsorship as in Executive Network (Consultants) Ltd v O’Connor. If so, the whole of the expenditure is disallowable. For example, a trader may decide, for purely commercial reasons, to sponsor a novice athlete who had appealed for sponsorship in the local media after reaching the finals of a major tournament at an unusually early age. There is an agreement between the parties setting out how much the trader will be paying and what services the sportsperson will perform in return; including a requirement that their equipment will be prominently marked with the sponsor’s name. In addition they will appear at certain corporate events. The cost of the sponsorship is allowable (apart from any sums disallowable as capital or entertaining – see BIM42555).

© Crown Copyright 2006. Reproduced by permission of HM Revenue & Customs.