Is a successful stud one which breeds the best horses or makes the most money from breeding? As always the answer depends.
As accountants advising both farmers and the bloodstock industry we see a wide variety of studs ranging from large thoroughbred studs, to small studs of just a few horses (often attached to another business such as a farm).
The diversity is wide. Some studs are very profitable while others make significant losses. Most are operated as commercial businesses, but there are others run as a hobby for the enjoyment of the owner.
Whatever the scale or reason for the stud, profits can never be guaranteed and even the best ones can make losses. But what marks out the most successful horse breeders is planning and a business-like approach.
Both at the outset – when considering breeding horses – and when running the stud itself, it is essential to be clear about what you are trying to achieve.
A business plan and cashflow projection are ideally drawn up at the start of the business. This should be monitored, compared to actual results and updated as the business evolves.
Regular commercial assessments on each individual horse should be done, so only horses capable of generating profits are retained. Retaining horses for private or sentimental reasons – for example a mare which finds it difficult to get in foal – will undermine the business case. These horses should be sold out of the business to private ownership for their market value.
Assess each foal shortly after birth to determine whether or not the anticipated sale price will more than cover the cost of keeping them. Quantifying costs associated with ‘non-business’ horses and treat them as private in the business accounts or tax computations.
The annual stud accounts should include a closing valuation of all the horses, foals and other youngsters in the business, valued at the lower of cost of production or market value. If the market value is below the cost of the production figure, then the lower market price should be used.
The general rule is that HM Revenue and Customs (HMRC) allow tax relief on expenses incurred for business purposes, ie: incurred in an enterprise carried on with a view to realising profits. The Revenue resist giving relief for expenses arising from a hobby. The business approach set out above will help support a claim for relief.
HMRC helpfully recognise horse breeding is an unusual and risky business, and losses are not unusual - particularly in the early years of a stud business. So long as the activity is accepted by them as being run on a commercial basis with a view to profit, loss relief is available as follows:
HMRC regard horse breeding as agriculture for tax purposes. This is very useful because additional farming tax reliefs are available to the stud owner such as Agricultural Property Relief from Inheritance Tax and Farmers’ Averaging Relief for income tax.
In the past, Agricultural Buildings Allowance would also have been available on capital expenditure on buildings for the stud, but this relief is being withdrawn from April 6, 2011. Tax relief on plant and machinery used in the stud business is available and follows normal business rules.
Advice should therefore be sought to identify expenditure which qualifies as plant and machinery as opposed to buildings.
All businesses need to register for VAT if their turnover exceeds the VAT threshold, which is currently £68,000. If the stud is run as part of a much larger business, then it will automatically be covered by the VAT registration of the larger business.
If the stud business is not part of a larger business and the turnover is below £68,000, then the stud owner can choose whether or not to voluntarily register for VAT.
Such registration means that output VAT needs to be charged on all sales, which effectively increases the cost of all your sales if the purchaser cannot recover this. However, registering for VAT does mean you can recover the input VAT from purchases.
Many smaller studs take in liveries to boost their income, particularly when they are building up their horse breeding enterprise. Remember, from a tax perspective, the livery trade will be taxed separately from the stud, and you will need to be able to attribute income and expenses between these two different trades.
The livery business is not treated as agriculture from a tax perspective, and if all the liveries are DIY, then the income may even be taxed as rental income rather than trading income.
Livery income is treated differently too, as it is exempt from VAT. In short, if you are breeding horses as a hobby, by all means enjoy it, but tax relief will not be available on your expenses. Take care that the nature of your activities and the number of your transactions do not inadvertently turn you into a business.
HMRC consider a number of factors when deciding whether or not you are running a business, including: the number and frequency of transactions; profit motive; duration any horse is kept; and the reason for its sale.
They may consider you are running a business – even if you are not.
For those running a business and seeking tax relief for their costs, make sure there is the evidence to support claims, so you can be sure to get timely tax relief on your expenses.