Proving commerciality in the thoroughbred industry

Running an equine enterprise requires long-term investment, particularly bloodstock breeding. Pinhooking, the purchase of foals to sell as yearlings or as two-years-olds at breeze up sales, provides a quicker return but still needs some capital outlay.  The decreasing number of thoroughbred foals produced in the UK is an indicator of how difficult it is to make a profit.

Both breeding horses and pinhooking need a commitment of time and money. Careful planning and a deep understanding of the market, its trends and what works are essential to position your business for success.

In the intricate world of UK equine businesses, commerciality is not just a buzzword; it is vital for sustainability and tax efficiency. 
Breeding and producing horses can be a feast or famine. Many small bloodstock businesses make losses for several years before a very good sale in one year – followed by more years of losses.

Given this, many businesses in the sector rely on offsetting losses, particularly in the early years, against other income sources. However, HMRC’s increasingly stringent stance on sideways loss relief has brought the issue of commercial intent into even sharper focus.

Sideways loss relief allows individuals to offset losses from a trade against other income, such as a salary or investment income, in the same tax year or, in some circumstances, earlier tax years. By doing this, individuals can potentially reduce their overall tax liability and, in some cases, create a repayment of tax already paid at source.  The idea behind the relief is to help fund early-stage businesses or provide relief in bad years.

Individuals can claim the higher of £50,000 or 25% of their adjusted net income against other income, provided they spend, on average, more than ten hours a week working on the business. They should, therefore, regularly collect evidence of time spent on the business.

In addition to this, to qualify for sideways loss relief, a trade must be carried out on a commercial and business-like basis, with a view to realising a profit, and demonstrate the ability to make a profit. When it comes to equine enterprises, especially those involving racehorse breeding, HMRC has been increasingly reluctant to accept they meet this threshold. Instead, they are often considered lifestyle choices or a hobby, rather than genuine commercial ventures.

If HMRC decides the business is not being run with the aim of making a profit, it will deny the relief. This will mean that any losses realised in the years HMRC deems the business not to be a commercial enterprise will be limited to being carried forward and offset against any profits made only in the same business in future years.

HMRC’s increased scrutiny poses a challenge for legitimate breeders and traders who operate professionally but whose profit timelines reflect the cyclical and speculative nature of the industry. These businesses must now go to greater lengths to demonstrate commerciality and prove that the business not only has the intention of making a profit but also the capability of producing it. 
Bloodstock has various unique challenges:

• Fashion
• A predilection for horses to kill or maim themselves
• Not being able to get a mare in foal every year
• Offspring not turning out as expected

HMRC wants to see that the business is run in a way that shows a clear intention to make profits. This includes having proper records, a realistic plan to become profitable, and a clear separation between personal and business activities.

There are several steps you can take to demonstrate compliance and commerciality to HMRC:

• Have a proper written business plan, outlining goals, how you’ll reach them and when you expect to make a profit. This must be realistic and take into account potential glitches and unforeseen circumstances
• Keep detailed records for all business activities, including sales, costs, breeding/purchase decisions and marketing methods
• Evidence the requisite level of knowledge to run the business profitably. Some people have strong bloodstock or veterinary knowledge, while others can produce brilliant spreadsheets. Seek advice for the weak areas
• Prove that the business shows flexibility and that its strategy is reviewed regularly to reflect market trends. If a mare produces two book three yearlings in two years, she should probably be sold.  HMRC wants to see that you’re managing the business actively and adjusting to market conditions
• Maintain a clear separation between your personal and business finances

These are not all formal requirements, but the more contemporaneous evidence that the business is actively and efficiently managed, the more likely HMRC is to accept loss relief claims. Furthermore, these steps will not only help with tax compliance but will also help drive your business to be more resilient. 

Bloodstock businesses remain a vital part of the UK’s rural economy and racing industry. But as the need for tax revenues grows, it’s more important than ever to demonstrate that your operation is serious, structured and profit-driven. Taking the right steps now will not only protect your tax position but also strengthen your long-term business. 

We have a wealth of bloodstock and pinhooking experience at S&W. Our understanding of what HMRC looks for and experience with commerciality enquiries could be vital for your business and ensuring loss relief is available to you. Please reach out if you feel we can assist with your enterprise.