If you run a business in which you own horses, one of the biggest problems you might face when doing your accounts is how much you value you place on your ‘stock’ at the end of the year.
So, how do you value horses within your business? First a bit of jargon,
Stock includes finished assets held or assets in the production process for sale in the ordinary course of business. The reason why a value is placed on the horses at the year-end is to match the costs incurred in producing or obtaining stock in the same period in which the income is earned from the sale of that stock. This will therefore generate a true profit achieved on the sale of that asset on which you will be subject to tax.
Stock is valued at the lower of cost (the total money spent on the asset) or net realisable value (the sales proceeds that are anticipated will be received from the asset). Production costs incurred in getting the stock into its condition and location at the balance sheet date are taken into account in the valuation process. Examples of production costs may be;
- Feed costs including forage
- Vets’ fees including drugs
- Supervisory employee or contract labour costs.
Given that the criteria are the “lower of cost or net realisable value”, this means it is important to keep detailed records of the amount spent to keep each individual animal during the year. At the end of the year you will need to reconcile the starting value at the beginning of the year and the value at the end of the year after taking into account the amounts paid during the year.
Stud Farms – the cost of mares and foals
Where a mare has been purchased by the stud farm, the acquisition price forms the ‘cost’ for stock purposes. If the mare has been transferred from training, then the market value at the date of the transfer is considered to be the cost for stock valuation.
When a nomination fee has been paid for a mare to be covered, it is accepted that this forms the cost of the foal when stock is valued. When the foal is born, the cost is increased by its cost of keep from the date of weaning until the sale or transfer into training.
There Is an Industry Standard of £75 per week to attribute to the cost of the animal but at the end of the year, if the net realisable value is less than the costs attributable to that animal, the stock value must be reduced.
For stallions, arriving at a net realisable value can be tricky as their value is very dependent on their popularity. HMRC accept in this case that a rule of thumb method can be used and the cost of the acquisition cost of the animal can be written off in equal annual instalments. This is until it reaches the age of 10. I.e. assuming that the value of the animal decreases as it ages. This method would not be appropriate where a better figure can be obtained at the year-end or where it would give an unreasonable result. For example, where the value of the animal increases or decreases at a significant rate.
In line with HMRC guidance where the cost of a working horse cannot be obtained, a stock value can be estimated based on 85% of the animals current market value.
Capital Assets – How do you value horses within your business?
Where horses are owned within a riding school where they are used to give lessons (i.e. the trade is in giving lessons rather than buying and selling horses), the horses should be treated as a fixed asset rather than stock. Then the value of the horses is depreciated over the lifetime of the animal (or at least best guess!).
A horse held purely for competing i.e. a showjumper should also be included as a fixed asset. Although, many animals kept purely for competing are owned privately and would not, therefore, be included in the business accounts.
Ultimately the key to valuing horses within your business is to ensure you keep detailed records so you can prove the valuation should HMRC ever question it. If you would like any further advice about the records you should maintain or the best way to do this please do not hesitate to get in touch.