I am lucky enough to combine my passion for horses into my day job here at Wilkins Kennedy and I am pleased to say that one of my favourite professional hazards is keeping up with the recent Cheltenham races. It reminded me of a scenario that I’d dealt with in a previous role, where a client had won money as a result of a bet on a long shot. In terms of tax there is a fine line between recreation and income – so make sure you don’t get caught out.
Prize money or income?
Here’s the scenario. You’re at Cheltenham and you decide to have a flutter on an outsider. The horse comes in first and you claim your 15/1 win. It’s a nice little earner and the great part is that you won’t pay tax on it because it is a genuine win, in the same way as a lottery ticket.
However, should you be the horse’s jockey, trainer or any other associated party that makes an income from the horse, the situation becomes a little different!
For example, for a jockey and trainer if a horse finishes first, second or third in a race, you will receive prize money on a previously agreed basis. As this is part of your trade this cash win would have associated tax implications.
Where an award is received, the determining factor in considering whether or not such an award is taxable is the quality of the award in the hands of the recipient. If the prize has come to you as a result of or in connection with your activities in your trade, profession or vocation, the prize money would normally be treated as a taxable receipt and included as part of your taxable profits.
For owners however prize money is not taxable in 99% of cases as HMRC do not consider that owning a racehorse is a trade. On the flip side losses from owning a racehorse are not allowable as a tax deduction against other income.
When is a prize not a prize?
However, a prize or award is not a business receipt in all cases, and the facts may show that the prize was unsolicited and was awarded as a mark of honour, distinction or public esteem in recognition of outstanding achievement in a particular field.
Perhaps your horse has won the last 100 races, has broken a world record and you (as an owner, trainer or jockey) and your horse are the first of your kind to ever attempt or achieve such an accolade. To mark the event, you may have been awarded a cash prize by Cheltenham themselves, or an associated awards body.
In which case, the prize money may not be taxable. Having said that, HMRC’s guidance suggests that most prizes that are earned in the course of your business are taxable, it is this that is the determining factor ‘is it business related’ – so it is recommended that you seek professional advice on this.
If the prize money is taxable, then you may have expenses which could be allowable, which would reduce the tax impact. If you consider that the prize should not be taxable, we would suggest that the money is still declared on your tax return and then disallowed. The rules regarding prize money is extremely complex, but here at Wilkins Kennedy, we have a specialist tax teams who can help. Contact us to find out more.