Defending dog breeders in HMRC tax investigations: A comprehensive guide

Understanding HMRC’s focus on dog breeders

HMRC has been increasingly vigilant in targeting dog breeders, particularly since the COVID-19 pandemic which led to a surge in demand for pets. The “one to many” letter campaign is a recent initiative where HMRC sends nudge letters to breeders suspected of underreporting income, urging them to voluntarily disclose any undeclared earnings before more severe actions are taken.

HM Revenue & Customs gathers information from various sources, including pet shops, pet insurers, the RSPCA, online platforms, and even social media. If discrepancies are found between the reported income and HMRC’s data, breeders can expect an investigation, which may lead to significant penalties, if not handled correctly. For more detailed guidance from HMRC on income reporting, click here.

Do you have to pay tax on dog breeding in the UK

Yes, income from dog breeding is taxable. This includes money earned from selling puppies, adult dogs, and even stud fees. Breeders must declare this income through a self-assessment, and if the turnover exceeds the VAT threshold, they may also need to register for VAT (and file VAT returns).

Whether dog breeding is classified as a hobby, an income-generating activity, or a full-fledged business depends on the scale and nature of the activity. HMRC assesses each case individually, but if breeding is done primarily for profit, it is typically treated as an income-generating activity or a business. For more on what constitutes a business activity, you can refer to HMRC’s guidance on business activities.

What expenses can be deducted

Only expenses directly related to the breeding activities can be deducted for tax purposes. These may include:

• Stud fees for male dogs.
• Health examinations specific to the breeding process.
• Feeding, veterinary care, and microchipping of puppies intended for sale.
• Accessories provided with sold puppies, such as collars or toys.

General living expenses for the dam (mother dog), such as food or general health checks, are not deductible, regardless of whether the breeding is considered a hobby or a business.

How we can help. expert review, representation, and voluntary disclosure assistance

At Francis Wilks & Jones, we offer thorough review and representation services for dog breeders under HMRC investigation. Our legal experts will:

• Review your financial records and the specifics of the HMRC inquiry
• Make strong representations to HMRC on your behalf, aiming to minimise tax liabilities and penalties
• Defend your position, especially if your breeding activities are side-line or hobby-based, ensuring that HMRC understands the true nature of your activities

In addition to representation, we specialise in assisting clients with voluntary disclosures to HMRC.

• If you believe you may have undeclared income or discrepancies in your tax filings, making a voluntary disclosure can significantly reduce the risk of penalties.
• You do not need to wait until you receive a letter from HM Revenue & Customs to make a voluntary disclosure.

In fact, by making a disclosure before they write to you may be used as mitigation against any penalties. We will guide you through the process, ensuring that your disclosure is complete and accurate, and negotiate with HMRC on your behalf to secure the best possible outcome.

For more information on how voluntary disclosure works, visit HMRC’s guidance on voluntary disclosures.

Our proven track record shows that we can often resolve these inquiries swiftly, sometimes with just one well-crafted response letter.

What to do if you receive an HMRC letter

If you receive a letter from HMRC, it’s crucial to act promptly. Here are the steps you should take.

• Read the letter carefully. Understand the allegations and any deadlines for response.
• Seek professional advice. Contact a tax or legal expert immediately to avoid making mistakes that could worsen your situation. Our team is here to help you today.
• Gather documentation. Work with your adviser to collect all relevant financial records, including receipts and records of income and expenses.
• Respond strategically. With expert help, prepare a thorough and strategic response to HMRC. Again – let out team help you with this. It could save you thousands of pounds.

Frequently asked questions

Do you have to pay tax on dog breeding in the UK?

Yes, income from dog breeding is taxable in the UK, and it’s important for breeders to be aware of their obligations under the tax laws. If you are regularly breeding and selling puppies, HMRC considers this an income-generating activity, and you are required to report this income through the income tax self-assessment process. This applies whether dog breeding is your primary business or a side-line activity. Failure to report this income can result in penalties, interest charges, and even legal action from HM Revenue & Customs.

• In addition to income tax, if your dog breeding activities generate a turnover that exceeds the VAT threshold (currently £85,000), you must also register for VAT and charge it on your sales.
• Even if your breeding activities are on a smaller scale, it’s crucial to maintain accurate records of all income and expenses to ensure compliance.
• Misreporting or underreporting income can lead to significant fines, and in severe cases, HMRC may investigate your entire financial history, which can be both time-consuming and stressful. For more details on income reporting, visit HMRC’s self-assessment guide.

How do I report dog breeding to HMRC?

If you are involved in dog breeding and have not declared your income, it is crucial to report this to HMRC to avoid potential penalties. You can report undeclared income by using the digital disclosure service, which allows you to make a voluntary disclosure to HMRC. This service is designed for individuals and businesses who need to correct their tax affairs, including those who may have failed to declare income from dog breeding. We can assist you with making the notification and disclosure.

When making a disclosure, you will need to provide detailed information about your income, including sales of puppies, stud fees, and any other related income.

• You will also need to explain why this income was not previously declared. Voluntarily disclosing undeclared income can significantly reduce the penalties imposed by HM Revenue & Customs, as it demonstrates a proactive approach to rectifying the issue.
• The penalties can range from 0% to 30% of the unpaid tax, depending on the circumstances. However, if HMRC discovers the undeclared income without a voluntary disclosure, penalties could be much higher.
• For those reporting others, HMRC also provides an online tax evasion reporting service, which allows you to report individuals or businesses you suspect are not complying with their tax obligations.

How to report over-breeding dogs?

Over-breeding, particularly when it results in poor animal welfare, is a serious concern and can be reported to several organisations. If you suspect that someone is over-breeding dogs and potentially causing harm to the animals, your first point of contact should be animal welfare organisations such as the RSPCA, which can investigate and take appropriate action. Over-breeding not only raises ethical and welfare issues but may also indicate that the breeder is earning significant income without declaring it to HM Revenue & Customs.

• From a tax perspective, if you believe that the over-breeding is part of an undeclared income-generating activity, you can report this to HMRC using their tax evasion reporting service.
• Over-breeding could indicate that a breeder is running a large-scale operation and possibly underreporting income to avoid paying taxes. Reporting this to HM Revenue & Customs can trigger an investigation into the breeder’s financial affairs, potentially leading to penalties or legal action if tax evasion is discovered.
• By reporting such activities, you not only help protect animal welfare but also contribute to ensuring that tax laws are upheld.

Can I claim tax relief for my dog breeding?

Generally, you cannot claim tax relief for personal pets, as they are considered personal expenses. However, there are specific situations where you might be able to claim tax deductions related to your dog, but this typically applies only if the dog is used for business purposes. For example, if you run a business that requires a guard dog or a working dog, such as a sheepdog on a farm, you may be able to deduct the costs associated with the dog’s upkeep, including food, veterinary care, and training, as business expenses.

• For breeders, while the general upkeep of a dam (mother dog) is not deductible, certain expenses directly related to breeding, such as stud fees or specific veterinary costs associated with breeding, may be deductible.
• It’s crucial to differentiate between personal and business-related expenses, as HMRC scrutinises claims to ensure that only legitimate business expenses are deducted. Improper claims can result in penalties or additional tax liabilities. For more detailed guidance on allowable business expenses, refer to HMRC’s expenses guide.

Our team can help you today

Facing an HMRC investigation can be daunting, but you don’t have to navigate it alone. At Francis Wilks & Jones, we specialise in defending dog breeders against tax inquiries, ensuring that your rights are protected and that you achieve the best possible outcome.

Contact us today for a consultation and take the first step towards resolving your tax issues with confidence.