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HMRC internal manual

Business Income Manual

Farming: stud farms: losses in stud farms

S68(3) Income Tax Act 2007 (ITA 2007), S49(3) Corporation Tax Act 2010 (CTA 2010)

The guidance on farming losses at BIM85600 onwards applies equally to stud farming. However, for the purposes of applying the reasonable expectation of profit test we have accepted that stud farming is a long term activity. Following discussions with the Thoroughbred Breeder’s Association in 1982, the Inland Revenue wrote to them as follows:

’it has always been recognised that some ventures are by their nature unlikely to show a profit by the sixth year of trading and section 397 (3)[now either S68(3) ITA 2007 or S49(3) CTA 2010] provides for loss relief to be continued after the fifth year where the claimant is engaged in a particular farming activity of an intrinsically long term profit making nature we have long accepted that the breeding of thoroughbred horses is such a long term venture, and provided that a stud farming business is potentially profit making, we would not normally seek to invoke section 397 (1) [now either S67(2) ITA 2007 or S48(2) CTA 2010]until after 11 years from the start of the business”’

The Thoroughbred Breeder’s Association have circulated this text to their members.

This does not mean, however, that all stud farming losses are relievable against other income up to 11 years from commencement. The requirement that the business should be potentially profitable (in other words, the question of whether S68(3) ITA 2007 or S49(3) CTA 2010 is satisfied) is important and should be checked in suitable cases. Nor should the letter be interpreted as meaning that the five year period is extended in cases where a run of losses arises in periods after a year in which a profit has been made, or in cases where a business is taken over as a going concern. Such cases should be dealt with individually on their merits.

Where the enterprise is clearly not being carried on on a commercial basis and with a view to the realisation of profits, a challenge under S66 ITA 2007 or S44 CTA 2010 which prohibit loss relief for uncommercial trades should be considered.