Are you selling puppies?: HMRC’s campaign on undeclared dog breeding income

However, along with rising puppy prices and expanding breeding operations, HMRC has intensified its efforts to ensure that any resulting profits are reported and taxed accordingly.

While breeding dogs can certainly be a hobby for many, it can also cross the threshold into a commercial activity – one that HMRC closely monitors.

This article explores how the HMRC campaign on dog breeders came about, how the authority is gathering data, what it means for breeders (particularly those who started or ramped up their activities during the pandemic), and the correct way to disclose income from dog breeding.

A brief history of HMRC’s focus on dog breeders

HMRC’s interest in dog breeders is not entirely new. Over the years, occasional investigations have targeted individuals suspected of under-reporting breeding income. However, the pandemic years (starting in 2020) proved to be a catalyst for sharper scrutiny.

With more people working from home and seeking pets for companionship, the demand for puppies and kittens skyrocketed, driving up prices and luring more individuals into breeding – even on a small scale.

Given the sudden surge in both amateur and professional breeding, HMRC recognised a growing potential for unreported income.

In the early stages, the authority mostly issued reminders and guidance through online forums and official documents, emphasising the tax obligations for those earning substantial amounts from breeding puppies.

As the situation evolved, HMRC began leveraging more sophisticated tools to track this newfound source of revenue more systematically.

How HMRC is gathering data

HMRC is increasingly turning to digital intelligence to identify under-declared or undeclared income. Specific tactics include:

1. Scrutinising online marketplaces: Platforms like social media groups, classified advertisement websites, and dedicated pet-selling sites often serve as the first point of contact between breeders and potential buyers.

HMRC can monitor these platforms, track frequent sellers, and cross-reference details – such as phone numbers, email addresses, and bank details - to identify patterns.

2. Data sharing and analytics: Partnerships with local authorities, veterinary organisations, and even licensing bodies help HMRC compile data on dog breeders who have applied for licenses. Sophisticated data analytics tools can compare licensing records against reported self-employment or business income records.

3. Payment trails: The rise of digital payment methods – PayPal, Venmo, bank transfers – provides a digital footprint. HMRC can issue requests for banking records if they suspect fraudulent or underreported income from dog breeding.

4. Tip-offs: HMRC also relies on information from third parties, which can include disgruntled buyers, competitors, or even neighbours who notice unusually high levels of dog breeding activity.

These multi-pronged efforts allow HMRC to form a more accurate picture of the scale and profitability of individual breeding operations. Once an individual is flagged for under-reporting, a formal investigation can commence, potentially leading to fines, penalties, and, in extreme cases, criminal prosecution.

The Covid pandemic boom and its consequences

During the pandemic, the surge in demand for puppies quickly translated to higher prices for many sought-after breeds. Where a puppy might have cost £1,000 pre-pandemic, prices of £2,000 or even £3,000 were not uncommon during the height of lockdown measures.

This price inflation, combined with the relative ease of advertising puppies online, saw a significant rise in the number of casual or part-time breeders.

For many, what started as a hobby - perhaps breeding one or two litters a year - shifted into a more consistent source of income, sometimes crossing into thousands of pounds annually.

Under UK law, if breeding is conducted on a commercial basis or if you earn above the personal allowance threshold, you are typically required to declare that income and, depending on the total level of earnings, potentially register as self-employed.

Those who did not realise the scale of this obligation – or chose to ignore it – are now catching the attention of HMRC. The pandemic period has seen many novices or informal breeders operating without a firm understanding of their tax responsibilities.

Consequently, these individuals face the greatest risk of compliance checks and, if found to be in breach, could be subject to penalties.

How to determine taxable income from dog breeding

The key consideration for HMRC is whether a breeding activity constitutes a trade. Indicators of a trade include regular or repeated transactions, a motive to make a profit, and a level of organisation consistent with a business. If you meet these criteria, the following guidelines generally apply:

1. Record-keeping: Meticulous records of all sales, breeding expenses (veterinary fees, stud fees, dog food, licensing, insurance, etc), and any other associated costs should be maintained. The net profit - sales minus allowable expenses - forms the basis for taxable income.

2. Self-assessment: Individuals who are self-employed or operate as sole traders must register for self-assessment with HMRC. Returns are filed annually, typically by January 31, following the end of the tax year.

3. Allowable deductions: Certain legitimate costs related to breeding can be offset against the income, reducing overall taxable profit. It’s crucial to separate personal expenses (like a pet dog’s general care) from those directly incurred for breeding.

4. VAT considerations: While uncommon for smaller-scale breeders, those whose taxable turnover exceeds the VAT threshold (currently £85,000) may need to register for and charge VAT. This scenario usually applies to larger, well-established breeding businesses rather than individuals producing occasional litters.

The correct way to disclose breeding income

If you have not previously disclosed your dog breeding income or suspect you’ve under-reported, it’s imperative to rectify matters promptly. HMRC’s standard route for self-reporting previously undisclosed earnings involves the following steps:

1. Notify HMRC: Inform HMRC in writing or online that you wish to make a voluntary disclosure about dog breeding income.

2. Gather records: Compile all income and expenses for the relevant tax years. Accuracy is paramount - errors or omissions can invite further scrutiny.

3. Complete disclosure: Follow the instructions provided by HMRC to detail your earnings and calculate your tax liabilities.

4. Payment: Pay the outstanding amount. If the liability is substantial, HMRC will often allow structured payment plans.

Voluntary disclosure typically results in lower penalties than HMRC might impose if they discover discrepancies through an audit or data analysis. The earlier you come forward, the more favourable your position is likely to be.

A tax specialist’s perspective

Aatif Malik, a specialist tax advisor, highlights the crucial need for proactive compliance amid heightened HMRC scrutiny of dog breeding income. He says: “While the pandemic increased demand for puppies, many breeders are unaware of their tax obligations. HMRC has the tools to detect under-reported income.

“If you’re breeding dogs commercially or as a side hustle, it’s vital to declare your income accurately. Voluntary disclosure is more cost-effective and helps avoid severe penalties.”

Malik emphasises that all breeders must prioritise compliance, as the risk of being caught is high.

The future of tax on dog breeding

HMRC is targeting dog breeders to improve tax compliance as the industry changes. The pandemic led to a surge in dog breeding, attracting many newcomers who may not understand their legal and tax responsibilities.

HMRC uses advanced data collection methods to ensure that all dog breeders, whether hobbyists or professionals, report their income accurately.

If you breed dogs, it’s essential to determine if your activities count as a business. You should keep clear records and file accurate self-assessment tax returns. If you realise you have reported less income than you should have, you can take steps to correct this.

Making a voluntary disclosure can reduce penalties and give you peace of mind. Responsible breeding includes caring for the animals and being honest about the income you make.

Mr Aatif Malik, is the Managing Director of Tax Accountant – A Specialist Tax Consultancy