A tribunal has decided that horse racing is not a trading activity. You would not bet on that changing any time soon, writes Peter Vaines (Squire Patton Boggs)
The tribunal has recently considered a claim for relief in respect of a loss incurred from horse racing (McMorris v HMRC [2014] UKFTT 1116).
In many ways, Mr McMorris’ claim looked quite promising. He was knowledgeable about horses and horse racing, and an opportunity arose for him to become involved in horse racing with a third party by their acquisition of a horse and the funding of all the relevant expenses. He did considerable research into the horse’s pedigree, took appropriate advice and went ahead on the expectation that with proper professional training, the horse would win races and be sold at a profit.
One can understand why Mr McMorris regarded this as an adventure in the nature of trade – and he would surely have felt that his view was vindicated when the horse did well and a substantial offer for the horse was received from a prospective buyer. Unfortunately however (you can see this coming), they decided not to sell but to continue in the hope that a higher offer would be forthcoming. It all went wrong and, after a comparatively short period, the horse was sold for virtually nothing.
Mr McMorris did not regard the activity as a hobby but as a serious, well researched business operation (registered for VAT) which represented an adventure in the nature of trade. Accordingly, he claimed that the loss he had sustained on the horse racing operation, amounting to approximately £12,000, should be allowable as a trading loss against his other income.
HMRC did not agree because its longstanding practice, and its firm view, is that horse racing is not a taxable activity. Accordingly, any winnings from racing are tax free and so would be the profit on the sale of the horse (had it taken place). It follows that any losses would not be allowable. One can, of course, readily understand why HMRC would take this view, as there is a greater expectation (and in my case, an absolute certainty) of loss rather than profit from horse racing.
HMRC has lots of support for its view, with the courts routinely acknowledging (if not expressly deciding) that horse racing is not a trading activity – even though it was held, in Benson v Counsell [1942] 24 TC 178, that sending a horse to be trained, raced and sold after racing was a taxable business.
This is to be contrasted with the operation of a stud, which is a taxable activity. Where a stud farm also races horses, the division between the two activities has to be clearly identified; and any movement of horses from the stud activity to the racing activity must take place at market value. This was the whole basis of the House of Lords decision in Sharkey v Wernher (1955) 36 TC 275.
However, Mr McMorris may have felt that his circumstances were sufficiently strong to overturn these long established principles – but I fear it would have meant a crusade because, had he been successful, a trip all the way to the Supreme Court may have been inevitable.
A tribunal has decided that horse racing is not a trading activity. You would not bet on that changing any time soon, writes Peter Vaines (Squire Patton Boggs)
The tribunal has recently considered a claim for relief in respect of a loss incurred from horse racing (McMorris v HMRC [2014] UKFTT 1116).
In many ways, Mr McMorris’ claim looked quite promising. He was knowledgeable about horses and horse racing, and an opportunity arose for him to become involved in horse racing with a third party by their acquisition of a horse and the funding of all the relevant expenses. He did considerable research into the horse’s pedigree, took appropriate advice and went ahead on the expectation that with proper professional training, the horse would win races and be sold at a profit.
One can understand why Mr McMorris regarded this as an adventure in the nature of trade – and he would surely have felt that his view was vindicated when the horse did well and a substantial offer for the horse was received from a prospective buyer. Unfortunately however (you can see this coming), they decided not to sell but to continue in the hope that a higher offer would be forthcoming. It all went wrong and, after a comparatively short period, the horse was sold for virtually nothing.
Mr McMorris did not regard the activity as a hobby but as a serious, well researched business operation (registered for VAT) which represented an adventure in the nature of trade. Accordingly, he claimed that the loss he had sustained on the horse racing operation, amounting to approximately £12,000, should be allowable as a trading loss against his other income.
HMRC did not agree because its longstanding practice, and its firm view, is that horse racing is not a taxable activity. Accordingly, any winnings from racing are tax free and so would be the profit on the sale of the horse (had it taken place). It follows that any losses would not be allowable. One can, of course, readily understand why HMRC would take this view, as there is a greater expectation (and in my case, an absolute certainty) of loss rather than profit from horse racing.
HMRC has lots of support for its view, with the courts routinely acknowledging (if not expressly deciding) that horse racing is not a trading activity – even though it was held, in Benson v Counsell [1942] 24 TC 178, that sending a horse to be trained, raced and sold after racing was a taxable business.
This is to be contrasted with the operation of a stud, which is a taxable activity. Where a stud farm also races horses, the division between the two activities has to be clearly identified; and any movement of horses from the stud activity to the racing activity must take place at market value. This was the whole basis of the House of Lords decision in Sharkey v Wernher (1955) 36 TC 275.
However, Mr McMorris may have felt that his circumstances were sufficiently strong to overturn these long established principles – but I fear it would have meant a crusade because, had he been successful, a trip all the way to the Supreme Court may have been inevitable.
