Tax Planning and the Sports Horse - Tax Attack on Duality
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The horsey culture is a thriving UK industry. The dream of the equine
enthusiast is to extend the passion (and what might have started as a simple
hobby) into a commercial activity.
Equine business clients and moreover potential equine business clients can be
found in every UK accountancy practice.
Wholly and Exclusively
HMRC have difficulty in accepting that expenses related to horses taking part
in competitions (e.g. dressage, eventing, show jumping) are incurred wholly and
exclusively for the benefit of a trade. In tax law this goes back to the
concept called ‘duality of purpose’, where HMRC effectively try
to argue that if someone enjoys what they are doing, any expenses associated
with the activity are disallowable. HMRC generally believe that many
equine businesses are an attempt to achieve tax relief for the costs of a hobby.
HMRC try to deny expenditure on the grounds that the taxpayer obtains private
enjoyment from the expenditure.
HMRC have historically been concerned about duality of purpose and personal
benefit. However, horses being competed professionally, which are either
for sale or being used for breeding purposes, should not pose a significant
problem provided income and commerciality can be shown as they will be able to
display the “badges of trade”.
The concept of duality can be explained by Mallalieu v Drummond
 57 TC 330 where black clothing needed for the appearance in
court was held to be needed for the more conventional use of clothing the body
The legislation that defines the allowability of expenses was contained in
s74 ICTA 1988, but is now in s34 ITTOIA 2005. Under this section, if an
expense is incurred for more than one purpose then no deduction is allowed,
except for any identifiable part or identifiable proportion of the expense which
is incurred wholly and exclusively for the purpose of trade.
McQueen, the successful rally driver
Good news for competitors with sponsorship arrangements! A recent tax
case “McQueen” (19 March 2007) has ruled it is all about the winning – winning
new clients that is. The decision in the tax case has resulted in a
helpful and favourable result for those involved in commercial sponsoring of
competitors of sports activities. In McQueen it was shown that the
marketing advantage was not vague and uncertain but was clear and successful.
There was evidence to demonstrate a direct correlation between sponsorship and
the gaining of new clients.
Mr McQueen was a good rally driver and he chose to publicise his coach
business by sponsoring a rally car which he drove with success. The rally
car was painted in the colours of the coach business and was generally high
profile – for example parked outside the business premises in Garelochhead and
apparently easy to see in that part of Scotland.
The question was whether the expenditure on sponsoring the rally car was
incurred wholly and exclusively for the purposes of the business or whether
there was a duality of purpose. HMRC argued that this was Mr McQueen’s way
of indulging his interest and the business purpose was incidental.
Promoting the Business
The Special Commissioner decided against HMRC by concluding that the whole of
the expenditure was incurred for the purpose of the benefiting the coach
business by the promotion of the name and facilities it offered. The fact
that it gave Mr McQueen satisfaction was merely a consequential and incidental
effect of the expenditure. The Commissioner stated that: ‘Mr McQueen used
his skill and enthusiasm for rally driving as the best means available for
promoting his coaching business’. Accordingly the expenditure was laid out
wholly and exclusively for the purposes of the coach trade and was fully
This may seem like a surprising decision because many have tried and failed
in this area before. There was evidence demonstrating a direct correlation
between the sponsorship and the gaining of new clients. It may be that in
another case such a correlation would not be so clearly established but it
certainly looks like a very helpful decision for the taxpayer.
Can equine businesses prove such promotion? It would be difficult to
paint the horses in the company’s colours, but what about the pictures of the
horses on the side of the company’s vans?
Purpose and Effect
In McQueen, the Commissioner’s view was that the expenditure had been
incurred for the purpose of promoting the business and getting names and
liveries into the public awareness. Although the taxpayer gained some
personal satisfaction from competing in rallies, his preferred leisure activity
was sailing rather than rallying and the private satisfaction of success on the
rally circuit was an incidental benefit of expenditure, rather than its purpose.
It has been argued that it is the purpose that matters, not the effect.
In many cases although there has been a benefit for the business, the taxpayer
could not demonstrate that the main purpose was anything other than for private
A sponsorship type of arrangement has to be able to prove purpose (to promote
the business) and the effect which was a direct correlation to sales. Can
the trader show more sales as an effect of the sponsorship?
A view to a Profit
Moving away from the sponsorship scenario, where the equine activity is
subsidised by an associated business, the other areas where HMRC are currently
taking a very keen interest is that of the horse businesses which do not produce
a profit. This is especially the case where the proprietor has other
income. The relevant legislation is now contained in s64 ITA 2007 onwards.
S384 ICTA 1988 has been replaced by s66 ITA 2007.
There are therefore two tests to be proven. One that the business is
being carried on with a view to profit and two, that it is commercial. To
quote HMRC: “We are after the extreme cases in which expenditure very greatly
exceeds income or any possible income which can ever be made in which, however
long the period, no degree of profit can ever have been reached.”
HMRC Brief 2 March 2007 and its “swipe” at sideways loss relief: relief is
limited to the first £25,000 of losses each year, unless the claimant works for
an average of 10 hours per week in the loss making business. This is
likely to be a problem for breeders – establishing a stud is a long term
business – though in reality the non racing studs are likely to have less
problems through this latest brief as the owners tend to invest more blood,
sweat and tears than financial contribution. Another point to watch is
that the restriction only applies to loss relief by partners – sole traders are
There is still the requirement that the business should be potentially
profitable. Can the non racing studs produce a business plan that shows a
profit? Can the potential sales proceeds cover not just the direct costs
(nomination fees) but also the overheads? Can these businesses contribute
to the projected profits with other income streams? Sponsorship?
Liveries? Would the diversification from the stud core trade of breeding
(which qualifies as husbandry for tax purposes) jeopardise the agricultural
The Competitive Sports Horse
It must be noted by the practitioner that in the “sports horse world”, e.g.
eventing, dressage, show jumping, showing, endurance riding and arab racing etc,
etc, there are different rules of breeding to the Thoroughbred bloodstock
The rules in racing prohibit using artificial insemination (AI) or embryo
transfer. In other areas of equine sport, AI is routinely used, meaning
that stallions compete at the same time as being used at stud. Even
stallions used for natural covering on mares frequently compete in the “sports
horse” world and have dual purpose and potentially conflicting treatment for
tax. Do the stallion rules apply or the competition horse rules?
Embryo transfers are used for good performance mares in show jumping,
eventing and polo, where the mare continues to compete while her genetic
offspring is developing in another mare via in vitro fertilisation.
Consistency of Treatment
This creates some interesting accounting and tax considerations and it is
essential that the practitioner understands how their client operates. One
of the biggest challenges is the stock valuation, for example how to treat the
stallion, how monies spent and received on AI are treated in the accounts.
The Thoroughbred racing industry has more definition through tax cases and
Inspectors' Manuals. There is greater flexibility for the sports horse but
it must be consistent.
Show jumping and the joys of ownership
The basic principle of Sharkey V Wernher i.e. ownership is
tax free and any profits and loss of owning horses is outside the scope of tax
is something that has been enjoyed by the show jumping industry. But the
business of show jumping can be run commercially- prize money, sale proceeds
from improved horses, basic dealing profits, liveries, training for pupils,
sponsorship etc can all result in a business plan that will show a profit and
genuine trading surpluses exist. The underlying overheads of show jumping can be
less than eventing - perhaps the costs of just one discipline not three helps.
It is perhaps a total mystery to those who live outside (and inside?) the
world of eventing as to why the industry cannot achieve commerciality? Most
competitors have to pay to compete and it is almost impossible to achieve
financial return from seeking to be a professional eventer! Badminton
Horse trials attract more spectators than almost any other European team
combined with the fact that our British teams are always successful at winning
team and individual medals. Why can that success not be reflected in a
commercial return? Are the costs of producing the horses and the events too high
in relation to the income streams? Are world TV deals missing? Perhaps the
absent ingredient of gambling income streams might be a disadvantage to the
Tax free ownership and transfers
Some clever but well balanced tax planning has been achieved with horses sold
to outside the business before they reach their full potential for success and
profitability. “Tax free” ownership profits have been made (compared to
£millions of “tax free” losses!) This system must not be abused. Any transfers
or sales must be a true market value (as per Sharkey v Wernher)
and convenient retrospective transfers are basically tax fraud.
Cynical transfers of prime prospects from the core commercial business to
say, family members, purely to move the animal from the taxable to non-taxable
environment will be subject to severe attack by HMRC. There are genuine examples
where racehorses, eventers and show jumpers are transferred to family members
from the “training business” to keep overheads reduced. Full records,
documentation of when, how and why must always be kept, especially the basis of
calculation of market value - ideally by an independent valuer.
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 2007-11-26 00:38:19 in Tax Articles