Focussed on your success

Equine, but not equitable

Author: Mark Witt
Date: 12th March 2014
Tags: Equine

Miscellaneous income: HMRC now targeting directors’ personal liability. In cases where sponsorship payments have been made by companies to events or teams connected with or run by the directors, it’s becoming increasingly common for HMRC to abandon its enquiries into the company accounts and try an alternative method of recovering its estimated loss of tax.

HMRC has developed a habit of stopping their active enquiries into the sponsorship expense deduction in the company accounts, and instead raising assessments on the directors personally, using the authority of the miscellaneous income provisions (S687-S689 Income Tax (Trading and Other Income) Act 2005). In broad terms, this is a where HMRC regards casual receipts as taxable under the miscellaneous income sweep-up provisions where it is received for a service performed as agreed/arranged for reward.

Where HMRC decides to take this route it leaves the directors either facing personal assessments for the amount of sponsorship payment, or accepting the original proposed adjustment of removing the expense from the company accounts for the purposes of calculating the corporation tax due on profits. I have seen this situation arise more than once, mainly in horseracing, and in these circumstances, it can have a nasty effect on personal tax.

For example, take a successful limited company, which is making annual sponsorship payments of, say, £50,000 to Mr. Director for the sponsorship of his string of racehorses. The company has an advertising plan in place and has all the usual safeguards to ensure that the payment meets the ‘wholly and exclusively’ test.  HMRC may put its company enquiries on the back burner once all the usual defensive cases such as ‘McQueen or Network Communications’ have been quoted back at them. 

However, the inspector might then raise miscellaneous income assessments on Mr. Director for £50,000 per year which would then be assessed at the director’s marginal rate. 

Equine training expenses not allowable: the horse advertises just as well in last place as first

The problem arises when you look at the miscellaneous income provisions.  These allow for the normal rules of expense deduction to apply and, as a consequence, the expenses still need to meet the ‘wholly and exclusively’ test.

Clearly Mr. Director’s biggest cost in running his string of race horses is the training fees. All of this seems pretty straightforward for Mr. Director.  On face value this seems like an equitable result and the (sponsorship less costs) amount will be assessed under the miscellaneous income provisions.

The kicker comes when HMRC floats the argument that the training fees for the horses are not an allowable expense.  The horse’s job is to advertise the sponsor; and it can adequately advertise the sponsor’s name from first or last place.  It doesn’t necessarily need to win or run fast to perform its task of carrying around the sponsor’s blanket and having their name on the race card.  Therefore, will HMRC allow the training fees? Not without a fight in my experience.

HMRC is likely to say that the level of training fees expended is a personal choice of the owner, Mr. Director, and as horse racing is not a taxable activity, it is unlikely to allow the training fees as an expense on the basis of duality of purpose.  HMRC will argue that the fees incurred with a trainer are to make the horse run or perform better and that this does not improve the ability of the horse to wear a branded rug or have its name in the race card.  You may argue that winning the race improves the advertising potential of the sponsor, which is a fair point, although the rejoinder is likely to be that the owner’s Weatherby’s compliant sponsorship agreement shows that the winner’s branding will be swiftly replaced by the race day sponsor’s in the winner’s enclosure. 
There is a defense to this HMRC argument: one can try to ensure that training fees are an allowable expense.  Please contact me (.(JavaScript must be enabled to view this email address)) for more details.

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