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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: layout of guidance

If a group of people join together for a common purpose their transactions with the umbrella body can be seen to be a mutual trade if:

  • the entity’s legal framework passes the tests for mutual trading (see BIM24020), and
  • the entity’s transactions are with customers who are also members, and accord with its legal framework.

If the entity is incorporated, its legal framework will be set out in its Memorandum and Articles of Association. If not, you will find it in the ‘rules’, or whatever paper sets out its constitution. There may also be agreements, contracts for services, for example, which deal with the transactions between the body and its members.

Immunity from tax on the grounds of mutual trading applies only to transactions in the nature of trade undertaken with the entity’s members. An entity that carries on a mutual trade with its members remains liable to tax on all its other income and gains (including the profits from any trade with non-members.

An entity may have both trading and non-trading transactions. Where transactions do not amount to trade (because, for example, they are not on a commercial basis - see BIM24045), there is no practical point in considering whether they are also exempt from tax on the grounds of mutual trading.

Where appropriate, you should agree an apportionment of income and expenses as between trade and non-trade on a just and reasonable basis that is consistent with the facts.

There is no relief for losses arising on mutual trading activities. Similarly, there are no capital allowances in respect of capital expenditure incurred for the purposes of the mutual trade.

The guidance refers to a number of cases concerning mutual insurance to draw out the underlying principles of mutual trading but for specific guidance on mutual insurers you should refer to the General Insurance Manual at GIM9000 onwards.

The guidance covers the following:

BIM24010 Income derived solely from members’ subscriptions/contributions
BIM24015 Introduction to mutual trading
BIM24100 The essential requirements for mutual trading
BIM24150 Non-mutual insurance trading activities
BIM24200 Members’ clubs
BIM24400 Incorporation
BIM24450 Allowable expenses
BIM24480 Allocation of income - mutual or non-mutual
BIM24550 Distributions
BIM24650 Specific activities
BIM24950 Deductibility of payments to a mutual trader
BIM24995 Tax cases referred to in guidance