We have a limited company client with a local hot food retail business.
The client sprung on me the fact (when records came in for accounts prep) that they had bought a racehorse and were running it under the sponsorship of the company. I have disallowed the cost, but the client isn't happy!
My reasons are that the business is one local shop, with very local customers, so a racehorse running at courses miles away isn't going to help boost trade. Secondly, all the invoices are in the name of a Director, rather than the company.
Finally, I know it isn't really a very good reason, but I am annoyed that this client has done this without asking for advice! This client has done similar things before, and just expects others to sort out the resulting mess!
Am I being reasonable, or am I letting my annoyance cloud my judgement?
Replies (18)
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Does the racehorse know his destiny?
When you say "hot food". He doesn't sell burgers does he?
I think you may be overreacting a little Shirley. There's no reason why your client can't also have a horse-racing trade (non-taxable) in his limited company. To the extent that the horse is used for advertising the catering business, a proportion of the capital allowances can be claimed against that trade. This all saves the tax cost of extracting the money from the company in order to fund it as a personal activity. It's not ideal though that the invoices aren't in the company name, as you say.
In the longer term, you may have to appropriate the horse to the trading stock of the catering business. I'd recommend against an election disapplying S.161 TCGA 1992, as the racehorse isn't a chargeable asset.
Deductibilty
My understanding is that the costs of upkeep etc, or a proportion of them, can be deducted if borne out by the facts, ie if there is a genuine benefit to the trade from the advertising/promotion. However, in that case, any prize winnings would cease to be tax-free.
I've never had a racehorse either
I've encountered the issue with a racing car, but the facts were slightly stronger.
My suggestion is essentially that from an accounting perspective all income and costs go through the accounts. For tax purposes, the income and costs from horseracing are treated as a separate trade, which isn't taxable (losses non-allowable). The horse is shown as a fixed asset and the catering business claims a proportion of the capital allowances (AIA if available) on the horse.
As BKD suggests, you could alternatively claim a proportion of the "running" costs and a proportion of the capital allowances, but you'd probably then render the whole of any winnings taxable.
As uktaxpal's case shows, you're unlikely to get a benefit in kind charge, which also ought to preclude a charge under S.1064 CTA 2010.
It is contentious, but I'd imagine that any argument will centre on the appropriate proportion that pertains to advertising the business. You need to have a discussion with your client about incorrect return penalties and reasonable care, and then discuss that appropriate percentage with him, I'd suggest.
The receipts are an issue
If your client had started correctly from the off and put it everything in the company name I'd be more confident in my advice above.
I'm not sure how long a period the receipts cover. The horse can be resold by the director to the company (but then you've got problems with claiming a proportion of the AIA), but the running costs (particularly during a period it's owned by the director, evidenced by a subsequent sale) would be pecuniary liabilities liable to tax and NIC. Until the horse is the company's asset, any payment by the company for the horse is a loan to the director.
On the VAT front, any winnings aren't VATable, as there isn't a supply. You can claim VAT on invoices in the director's name where he acts as agent of the company, but it's probably hard to justify that treatment in these circumstances.
I also agree that there's not probably not a lot of mileage in a sponsorship based argument, but because it's a company you may be able to move the whole horseracing activity.
If you can get it on an even footing, you can have the company carrying on the non-taxable racing trade. As it is, I must agree, it's open to attack that the company is simply funding the director's personal horseracing activity.
VAT
On the VAT front, any winnings aren't VATable, as there isn't a supply.
Unless the Owners' Scheme is used (and which I think would need to be used in order to secure input VAT recovery on relevant expenses).
Thanks
I'd not come across the Owners' Scheme, but paragraph 14.7 of V1-6 is suggesting to me that in these circumstances, input VAT is only restricted to the extent that the horse is used for entertainment purposes?
I haven't come across a similar situation but I would personally think that such the horse needs to transferred to the director's loan account. And no VAT should be claimed on the purchase. It does not help the director's case that all paperwork are made to his name.
And if his loan account is overdrawn as a result, then a provision of S455 needs to be made.
However after reading the article from UKtaxpal, I am not sure what to think of all this.
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If the costs are through the P&L (as opposed to DLA) and added back for Corporation Tax then the director has won out of this arrangement.
Surely the costs need to go to the DLA or he has to be assessed on P11d?
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we have a client (builder) who tried this on. It was a racehorse which was named after the business so there was some element of promotion.
We treated the running costs (wrong terminolgy I suppose) as DLA, but we took a deduction for advertising through the company accounts. His wife owned the horse personally and we included her advertising revenue in her books.
Of course she made a loss in her business as professional racehorse owner, which we didn't utilise against anything.
I agree...
.... that to the extent that expenses are in the director's personal name and can't be said to have been incurred as the company's agent, then just adding them back isn't going to take away the BIK/earnings/od loan account issues.
If you get things on an even keel going forward though, there's no reason why the horseracing activity shouldn't go through the company. Horseracing is a trade that HMRC don't tax (so they don't have to allow relief for losses). If you expect to profit from it in the longer term though it's better off being non-taxable outside the company.
You're right, Steve
All racehorse owners that I deal with own them specifically for racing - I haven't had to consider ownership in the context of advertising etc of an existing business and my thinking has been clouded by that direct experience. The Scheme allows recovery of VAT that would otherwise not be possible but as you say where the horse is being used for advertising/promotion, VAT should be recoverable subject to usual rules.