With the quality of Irish bloodstock improving, many owners have faced higher tax bills. It is important to speak to your accountant about how to minimise your liability.
Ireland’s horse industry has a proud tradition of competing successfully at the highest international levels. In recent years, the quality of Irish-owned horses has continued to improve and many owners have achieved strong prices at the sales. While this year is very difficult with sales postponed due to Covld-19, selling bloodstock can still result in an income spike for horse owners which, in turn, can lead to increased tax liabilities on profits. It is important to understand the main taxes involved and the steps you can take to minimise your liability.
Income tax
Earnings from bloodstock operations and stallion stud fees are subject to income tax at your marginal rate. This can be as high as 49.5% when PRSI and USC are taken into account. In some circumstances, although you may not make any actual profit in a given year, you can still be deemed to have made a taxable profit. To calculate your income tax liability you need to be aware of the valuation rules for tax purposes of stallions, broodmares and their progeny. These rules set out when a deduction for a purchase can be claimed against your tax.
Unlike other animals, stallions are not regarded as stock-in-trade. So, when you purchase a stallion, you cannot claim the full cost against your income tax in the year you make the purchase. Instead, you must claim over a four-year period. Broodmares are valued at either cost or net realisable value, whichever is lower. For broodmares that you breed, ‘cost’ is calculated as the cost of raising them until they are three years old. At your accounts year-end, the value of mares in-foal must include the value of the foal. This is usually calculated as the stallion fee paid plus the costs associated with keeping the broodmare from the date of her covering
Horses in training
Profits earned on horses in training are not taxable. Likewise, any losses incurred on these horses are not deductible against other profits. A horse is deemed to be in training if it is registered with a relevant sport horse association.
Horses kept as a hobby
If you are keeping horses as a hobby then the profits are not subject to tax. Likewise, losses made on a hobby are not deductible against other taxable income. Usually, it is obvious whether an operation is a business or a hobby however this is not always the case. In certain situations, a horse owner may continually make losses while trying to operate as a business. Equally, an owner may make a significant profit on horses owned as a hobby. Generally, Revenue will argue that an operation is a business if profits are being earned even though the facts of an individual case may not corroborate this.
Business structure
If you are likely to make a significant profit from your horse ownership activities, it may be advisable to incorporate your business so as to avail of 12.5% the corporation tax rate. However, before deciding to incorporate, it is essential to obtain professional advice as there are various actions which must be undertaken to achieve a proper transfer of your business into the new company. Generally, incorporation of bloodstock operations can be structured to allow significant profits earned and taxed by the new company to be withdrawn by way of repayment of a director’s loan. An example would be where a loan made by a director to the company comprised the value of stock and machinery used in the business on incorporation of the operation.
Value-added tax
For VAT purposes, breeding horses is deemed to be a farming operation. While farmers are not required to register for VAT unless they are carrying on other VAT-able activities, they may elect to register. If you do not elect to register, you are considered to be a ‘flat-rate’ farmer for VAT purposes and are entitled to apply a flat-rate addition of VAT (at present 5.4%) to your prices when supplying produce and services to VAT-registered customers. When deciding whether to elect to register, it is useful to compare the potential VAT you could reclaim from VAT on expenditure to the additional administrative costs incurred on operating VAT. If you do not register for VAT, you cannot reclaim the VAT incurred on purchases.
VAT on imports and exports
Sales of horses to persons in the United Kingdom and other EU member states are relatively common among Irish horse owners. Calculating the VAT due on these transactions is often tricky and requires significant attention to detail to ensure that it is applied correctly When importing horses from the UK or an EU member state you will need to register for VAT if the value of imports exceeds €41,000 in any year. As a result of Brexit, there will be some VAT changes when dealing with the UK, most likely from January 2021. When there is clarity on these changes, we will advise in these pages. If you purchase an animal or service from an entity outside of the EU you must register for VAT regardless of the cost or value of this animal or service (such as insemination services). The VAT registration in these scenarios affects only the transaction in question. It does not mean you need to charge or account for VAT on any of your other operations. When you sell horses to a purchaser in an EU member state you may be required to register for VAT in that EU member state if your sales exceed that member state’s distance selling threshold. The current distance selling threshold in the UK is £70.000.
VAT on horses in training
Horses in training are outside the scope of VAT. This means VAT is not charged on the sale of these animals. VAT refunds cannot be claimed in respect of expenditure on animals in training. Flat-rate farmers providing racehorse training are required to register for VAT where turnover from this activity exceeds €375,000 in any 12-month period. This VAT registration is ring-fenced so that other farming activities are not brought into the VAT net.
VAT rates
If you elect to register for VAT (or are required to because you are importing horses) the VAT rates that apply are: 4.8% where the horse is sold to a flat-rate farmer or sold to a factory for the use in food products, 9% on the sale of racehorses or the supply of horses to other VAT registered entities and 13.5% on the provisions of insemination services. Farmers in Ireland’s equine industry play a vital role in the rural economy and enjoy a well-earned international recognition. However, strong sales prices come with tax consequences. Now is the time to talk to your accountant about minimising your tax liability and choosing the best structure to achieve long-term success and sustainability for your business.
If you would like to gain advice in relation to the above, contact our tax team today here.