# vat implications of running a stud



## Deborahm (21 December 2009)

I read a small article in this week's H&amp;H about there being less inheritance tax and vat if you run a stud. My mum has run a small stud for over 40 years now. She has been registered as a stud with the WPCS during that time, and her foals are all registered with various pony societies. I too have now bred a couple of registered sports horse foals by registered SHGB stallions out of a Wetherbys TB (graded) mare. 

The cost of upkeep is now becoming too much and mum is gettering older. We've been funding the stud as a 'hobby' up to now and have not explored any of the possible financial benefits. 

I wondered if someone could tell me more about the VAT and inheritance tax implications of running a stud? How many foals/horses do you need to be seen as a stud in the eye of the tax man, and do you need to have your own stallion?


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## Touchwood (21 December 2009)

I can't help you with Inheritance Tax, but VAT is VAT - we are VAT registered, and have to pay it/claim it as any other business would.  Effectively you have to put VAT on anything that is a 'service or a good' produced by the business.


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## gnubee (24 December 2009)

Not an expert in the field, but this is how I understand it:
VAT
You are required to register for VAT once your turnover exceeds a set level (currently £68,000 per year I think). This means you will pay input tax to your suppliers as usual, and must add the VAT (curently 15%) onto your customers bills ("Output tax").  You can also voluntarily register once you exceed a lower threshold (I think £37,500?) if you think VAT registration would be of benefit to you.
You are obliged to pay the output tax over to HMRC, but can reclaim the amounts you have paid to your suppliers from them. This means you will need to submit a VAT return (usually every 3 months, though there are some (restricted) ways to change the regularity) saying (e.g. I paid £100 VAT on hay, £600 VAT on farrier; I have charged £1000 VAT on coverings, Net VAT payable for the quarter = £300) and you then pay the £300 over to HMRC. Similarly if you had paid more input tax than output tax (perhaps in a period where you don't sell many coverings) then you would be in a net reclaim position and can recover the net difference for the quarter from HMRC. 
If your business makes a profit, you would almost certainly be making net payments to HMRC. If most of your customers are private mare owners, you may also need to consider the implications of an extra 17.5% on the price of their coverings. However, if you mainly deal with other VAT registered businesses, they will not be put off by VAT on your prices as they can reclaim it themselves through their own VAT returns.

Inheritance Tax
For inheritance tax, if the deceased has been owned a business for more than 2 years, business property relief is available. This means you can make a claim to HMRC to apply the BPR and transfer a business (sole trader, partnership share, or limited company shares) without paying any inheritance tax on the value of the business.  There are rules that stop you sticking loads of personal cash/assets in the business and claiming relief for those too, but the real assets of the business that are actually used for the purposes of the trade would not be subject to IHT.

To qualify for either BPR or VAT registration, you must be recognised as carrying on a trade. This means the performance of an activity with a view to making a profit.  It is in fact likely that in running a stud (even as a hobby) if she is selling either coverings or foals, then it is likely you already have a business (and ought to have been paying tax on the profits if there have been any).
If running the business as  a sole trader, you would pay tax on profits as if it was a source of personal income. If you incorporate as a limited company, you will pay companies tax on the profits of the company, and then will also be taxed as an individual on the dividend the company pays to you. 
Generally it is cheaper to have a limited company if you are a lower rate taxpayer, but if you pay tax at the higher rate then it is more debatable.
As a limited company the company's activities can also not fall back on you as an individual, so (e.g.) if you got sued and for some reason were not covered on your insurance, as a sole trader you as an individual are liable and can be made bankrupt by the suit. If you have a company, the company is sued and can be forced to liquidate to settle as much of the debt as possible, but the personal finances of the owners could not be touched by the suit (except for in VERY unusual circumstances).

I would strongly recommend that you invest in either a decent lawyer or accountant for a session on how to proceed with respect to VAT and IHT, as they will be able to examine the detailed ins and outs of your business and let you know what you currently qualify as, and what you would have to do to become a business/not a business depending on which would be best for your personal situation. I would also take advice on whether it is worth incorporating the business as a limited company.


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