Sponsorship and the tax allowability of horse racing expenditure
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Sponsorship is currently an essential element of the commercial viability of
the racing industry. Since 1994 the owner is in a position to benefit from the
financial rewards of the fiscal advantage of well structured and compliant
sponsorship. All trainers are aware that “tax breaks” for the owners can provide
financial and emotional incentives to increase the number of horses in training.
The whole of the racing industry is acutely aware of the need to keep owners
Owning Racehorses is “tax free”
The ownership of racehorses is generally “tax free” i.e. outside the scope of
tax. This means that whilst winnings and profits on disposal of racehorses are
not taxable there is a balance in that the costs of training are not deductible.
In the minds of HMRC (H M Revenue & Customs) racing is therefore deemed to be a
recreational activity or in the case of a company a non-taxable activity.
Racing and the “owner breeder” – is it tax allowable?
When is racing “taxable”?
For the owner breeder, racing is often an integral part of a stud farm’s
activities and should be taxed (and in balance achieve tax relief) as part of
the breeding activity, yearlings are transferred from stud to racing and
returned to stud after their racing career. The tax case that directs the
allowability or otherwise of the cost of racing is Sharkey v Wernher. The
arguments put forward for allowability are that for the future commerciality of
the stud 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 the horse retention for a breeding career. Where this can be justified,
a breeder’s racing activities can be regarded as an integral part of his
breeding trade for tax purposes; the expenses of racing become an allowable
deduction and winnings taxable as trading income. HMRC accept more readily that
fillies should be considered as tax allowable as statistically a higher
percentage return to their breeders’ stud operations. HMRC look very closely at
the evidence to support the justification.
Test of racecourse – ownership and publicity
As part of establishing the “test of the racecourse” argument it is important
to ensure that the name of the Stud is also promoted and that the ownership of
the horse is in the name of the stud (as opposed to the individual owner) to
give maximum promotion. The publicity angle of stud ownership will apply to the
race card, publications etc.
Racing – the profile
Horse racing is currently a high profile sport and one that achieves maximum
television coverage. Many companies use the vehicle of the racing industry to
promote their services and products through advertising and sponsorship. The
expenses incurred in connection with racing by companies which do not operate a
racing or breeding trade can achieve tax allowability. Common examples of such
expenditure include the company owning and running a racehorse via the medium of
sponsorship and advertising. The claims for these types of expenses to be tax
allowable are always examined with caution by HMRC.
The private company
In order to successfully claim a deduction for racing expenditure as tax
allowable it may be more difficult when the directors of the company themselves
have a known interest or history in racing, particularly where it is in a
private company. HMRC may argue that the expenditure has been incurred because
of the personal interest of the directors rather than for the benefit of the
trade (see below). There is also the risk that there may be a taxable benefit on
the directors of the company where HMRC regard the company’s racing expenditure
as a benefit for the director. Such tax treatment is more likely to be promoted
by HMRC where the company is a close company as defined by Section 414 ICTA
1988, e.g. where it is more likely that a director shareholder will be able to
influence the authorisation of the spending of the company money.
Incurred for the Benefits of the trade of the Company
The basic understanding of the rule for deductibility of the expense is found
in Section 74 ICTA 1988. It is stated that expenditure will be deductible if it
is wholly and exclusively incurred for the benefit of the trade of the company.
In general, a company will be able to obtain tax relief for racing expenses (and
conversely will be taxed on any race winnings). Where the detail of the
expenditure can satisfy HMRC that this is incurred to promote the companies
trade or business activity for example by increasing awareness of its products
services and brands then tax relief can be achieved. As already discussed
advertising and sponsorship may help satisfy this criterion.
Sponsorship expenditure driven by the needs of the family rather than the
needs of the business
Executive Network Selection v O’Connor SPC 056
The relevant section of the decision is included below:
Here Mr Toms and his co-director, Mr Kemp, were witnesses of the highest
integrity. We are entirely satisfied from their evidence that the sponsorship
payments were laid out for the purpose of EN’s trade. But, however hard we
review the evidence we cannot displace from our minds the conclusion that
‘personal benefit’ played a part in the decision to make the sponsorship
payments. The benefit to Mrs Toms’ trade was more than an incidental result of
the expenditure. The decision to fund Mrs Toms in year 1 in her stocking-up with
competition horses must, we think, have been a joint decision of both Mrs Toms
and Mr Toms in which the long-term capital requirements of her personal business
were a key ingredient. The decision to provide part of the cost of Mrs Toms’ new
horse box in year 4 was another decision to lay out funds for the purpose of her
business. The annual decision as to the quantum of the sponsorship was, once
again, directed as much at the needs of Mrs Toms’ business as at the benefits
obtained from sponsorship. It seems to us, therefore, that the non-trade purpose
(from EN’s point of view) of benefiting Mrs Toms’ business coupled with the
furthering of the children’s equestrian careers can properly be described as
conscious motives of the decision-makers so far as concerned the decision to
make the payments with which this appeal is concerned. The interposition of the
BEF [the British Equestrian Foundation] from 1 January 1991 onwards does not
alter our conclusion that benefiting Mrs Toms’ trade was a purpose of the
expenditure. It is not, therefore, strictly necessary for us to apply the
concluding sentence in the passage cited from Lord Oliver’s speech. However,
even if we were wrong so far, we would still be against EN. It seems to us that
the non-trading result (i.e. funding Mrs Toms’ business as distinct from EN’s)
was a result that was so inevitably and inextricably involved in the sponsorship
activity that the result must have been a purpose of the activity. In this
connection we cannot accept Mr Ewart’s [appearing for the company] argument that
that passage, which develops Lord Brightman’s reasoning in Mallalieu, is
confined to the three instances of expenditure on necessities of life, i.e.
clothing, food and accommodation. Nothing in Lord Oliver’s amplification of the
Mallalieu reasoning suggests that he regarded Lord Brightman’s reasoning as
being limited in the manner suggested by Mr Ewart. Even if the motive to provide
funding for Mrs Toms’ business and for advancing the equestrian careers of the
children had not been a conscious motive (which we think it was), it was we
think inescapably one of the objects for incurring the sponsorship expenditure.
The point of interest is that, although the benefit of the sponsorship was
the business of Executive Network, the motivation for the expenditure was
Promoting or advertising the company’s products or services
A company will only be able to claim a deduction for the cost of keeping and
training a racehorse (or a number of racehorses) if it can show that the
expenditure is for the purpose of promoting or advertising the company’s
products or services. The ability to claim the tax relief will be dependent on
the 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 presents capital expenditure but tax relief is achieved should the horse be
written down to much lower value (which is too often the case in racing).
The factors to be considered when trying to determine whether advertising
expenditure is incurred wholly and exclusively for the benefit of the trade
Is there evidence that the horse is being used for advertising purposes?
(Where the horse is named after the company or its products then the expenditure
is more likely to be accepted as advertising).
• What is the purpose behind the expense – is it to provide a corporate
entertaining package or is it genuine advertising? What do the minutes and
authorization documentation set out with regard to the expenditure?
• What is the form of the advertising and is it in keeping with the company’s
size, structure and image? Is it part of a comprehensive marketing and ”PR”
• Is the amount spent reasonable in relation to the benefits claimed from the
advertising or promotion? What is the percentage of total spent?
• Is the advertising likely to generate more business and has the decision to
advertise in this way been based on commercial principles? Can such inflow on
new business be supported by fact?
The facts behind the promotion of business through racing
It will be essential to support the arguments for the promotion of the
business through racing with facts e.g. statistics, Company Minutes, marketing
reports, documentation of authority for expenditure etc, etc.
Racehorse Sponsorship v Advertising
As already mentioned, in 1994 owner-sponsorship was introduced into the sport
of racing. The change allowed owners to be sponsored and the sponsor to
advertise on the jockeys silks and horse rugs etc. Before entering into any
sponsorship agreement, companies should consider how the agreement can be best
structured for tax so that the maximum relief is obtained for the company.
Claiming a deduction for a sponsorship payment should be no different to
claiming a deduction for advertising expenditure if the structure is correct and
documentation is in place..
In structuring sponsorship agreements there are a number of basic principles
which should be followed as set out below:
1. It is helpful if the horseracing sponsorship is not the only promotional
activity and that it forms just one part of a company’s programme. It is
essential if the reason for the sponsorship is documented beforehand, for
example in the minutes of the company’s Board meetings.
The sponsorship expenditure should be revenue in nature in the hands of the
payer since no deduction will be given where the company is incurring
expenditure of a capital nature, e.g. fixed assets such as the acquisition of a
racehorse, or a share in a racehorse. It is for the recipient to decide how the
money should be spent and even if the recipient chooses to acquire a racehorse
the expenses to the company of keeping the racehorse should still be deductible
as a revenue expense. This can present quite a nightmare for the company auditor
in carrying the tests between capital and income.
3 The main benefit of the sponsorship expenditure must be to the trade or
business activity of the company, and the company 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 company can show
that the sole purpose of the payment is to help market the company’s products
and services and that any benefit to horseracing is incidental. This is not a
principle that the horse racing industry might support or enjoy.
4 The sponsorship agreement for racehorses and race meetings should be
included in the trading company whose trade is to benefit from the sponsorship
and not, for example, in a non-trading holding company of the group. Where a
horse or race is to be named after the company it should be named after a
trading company rather than a holding company and the sponsorship should have a
clear benefit to its trade or business activity.
The question of Corporate entertaining
A benefit to a company of sponsorship is that it may provide the company with
a structured corporate entertaining package, for both staff and clients. A
company will only achieve a tax allowable deduction for entertaining expenses if
it relates to the entertaining of staff (although the staff could face personal
tax liabilities). Sponsorship deals that include an entertaining package should
be carefully structured and recorded so that the entertaining element, if any,
can be separately identified and the size of any disallowed expenditure
identified. It may be preferable to agree an allocation of cost, showing the
element which relates to entertaining, with the provider of the packages, rather
than leave it to HMRC to suggest an apportionment on a basis which would
disadvantage the company. It is essential that good, cross-referenced
bookkeeping clearly identifies the difference between client and staff
Rewarding of staff
The difference between entertaining clients and rewarding of staff is
significant for tax purposes, i.e. the size of the company tax bill. Where an
employee is involved in entertaining clients then this is claimed as client
entertaining and the company will not achieve tax relief on a deduction for the
expense. There will also be no benefit taxable on the employee where the
employee is entertaining clients and not purely there for the pleasure. Where
the company is solely entertaining employees, for example by paying for a day at
the races the company will be able to claim a tax deduction for the expense but
the employee will be taxable on the benefit received.
There are many ways of achieving tax efficiency through racehorse
sponsorship. The key is review, planning, structure and documentation – as with
any tax planning there are judgement calls to be made by the tax adviser and the
rules have to be explained to the client at an early stage.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland House, West
Street, Alresford, Hampshire, SO24 9AT. Tel: 01962 735544. Email;
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180 (2nd
edition) and Equine Tax Planning ISBN: 0406966540. To order a copy call Tottel
Publishing on 01444 416119.
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Article Published/Sorted/Amended on Scopulus 2007-07-20 23:17:03 in Tax Articles