When Orwell saw a kid whipping a horse, he had an idea: "It struck me that if only such animals became aware of their strength we should have no power over them, and that men exploit animals in much the same way as the rich exploit the proletariat."
Hello, Animal Farm.
On Orwell's Animal Farm—originally Manor Farm—different animals represent different members of the proletariat (working class) or the Russian communist regime. We won't take you through all the details here (see "Symbols, Imagery, Allegory" and the "Character Analyses" for the full lowdown), but the point is that Orwell picked the setting of the farm because it would work well as an allegory.
At the same time, Orwell includes little details like, "the birds jumped on to their perches, the animals settled down in the straw, and the whole farm was asleep in a moment" (1.20). There's no allegorical purpose to these images; they just give the setting a sense of completeness (although may not exactly realism).
But why an English farm rather than, say, a Russian farm? Well, Orwell wasn't just criticizing Stalin. He was also criticizing the myth of Stalinism that intellectuals all over the West believed. By setting it in England, he brought it that much closer to home.