What you need to know about HMRC’s scrutiny of the commerciality of the racing business in the past few years, writes Catherine Pugsley
Braving the bitter cold at the Blackford & Sparkford Vale point-to-point at Charlton Horethorne last week, I exchanged my betting slip for a crisp five-pound note as River Myth came in second and my each way bet paid off.
Later that week, with a frisson of pride, I watched Bryony Frost come romping home with Frodon at the Cheltenham Festival, a great achievement for the girls. But what of my crisp fiver and the returns garnered by all those punters who bet on Frodon and Frost at 9/2 – does Her Majesty’s Revenue get a cut from our luck?
No tax is payable from money won from gambling and my five pounds was entirely tax-free. This is a useful government policy decision as gambling is an activity where there are overall more losses than gains. So large are the losses (£20 in my case), that if they could be offset it could potentially cost the UK Government revenue on any gains – certainly in my inexpert hands.
And what of the prize money won by the owners of Frodon and River Myth? Tax is normally not payable on the prize money from racing since the vast majority of racehorses never earn sufficient prize money to cover a fraction of the enormous costs of training them.
But there is a fine line between hobby and trade and the activity should be considered in the round. Is the activity a private owner racing for fun in the local point-to-point or a stud and trainer turning out Cheltenham cup winners?
HMRC has been scrutinising the commerciality of the racing business in the past few years. An individual hobbyist owning a racehorse where that ownership is considered to be a hobby and for pleasure may not be considered to be a taxable business and of course may not offset any losses or costs on this basis.
Many hobbies have evolved into businesses with a view to profit and not for recreation, at which point the business becomes a taxable activity. An owner of one broodmare that produces a foal every couple of years is more likely to be treated as a hobbyist because maintaining a mare for a number of years and paying for nominations (stallion cover fees) can amount to tens of thousands of pounds.
Waiting for the mare to produce progeny is a considerable investment before the commercial viability of the mare is established; obviously, these costs and any losses on nomination fees will not be deductible. The maintenance of a stallion could be classed as an investment (to cover the broodmares) or taxable as a trade depending on the number of nominations he makes.
Where there is a considerable investment in both broodmares and stallions it is more likely to be seen as a bona fide commercial activity. HMRC might be seen to call into question the offset of losses where they can argue that there was no commerciality in the business with costs and losses deducted accordingly.
My last win before the River Myth windfall last Saturday was the Brexit result earning me a healthy £23.70 return on my £10 stake. Post-Brexit, the UK is seeking registration as a listed ‘third country’ so that equine movement across the EU can continue backed with identification documentation and a health certificate.
If the EU does not list the UK as a third country, Frodon and River Myth might have to spend their racing days in the green meadows of this Sceptred Isle and will not be earning their winnings at the Auteuil.
Catherine Pugsley is a senior associate at boutique private wealth law firm Maurice Turnor Gardner LLP