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HMRC internal manual

Business Income Manual

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Meaning of trade: mutual trading and members clubs: introduction: further early mutual insurance cases

The House of Lords approach in New York clarified

In CIR v The Cornish Mutual Assurance Co Ltd [1926] 12TC841 the company was incorporated under the Companies Acts as a company limited by guarantee (and so had no share capital). The company carried on a mutual fire insurance business. The persons insured and the members of the company being one and the same body of persons. The House of Lords decided unanimously that Cornish Mutual was trading and was liable to the then form of Corporation Profits Tax. At the time the legislation included a provision to the effect that profits shall include in the case of mutual trading concerns the surplus arising from transactions with members.

Whilst the actual result in Cornish Mutual depended on particular legislation which was repealed long ago, the significance is that thereafter (despite what the House of Lords seemed to say in Styles v New York Life Insurance Company [1889] 2TC460 - see BIM24035) it could no longer be argued that a mutual insurance company did not carry on a trade or business merely because it was mutual. The view taken from Cornish Mutual onwards is that a mutual insurer (and indeed any mutual trader) does carry on a trade but does so on mutual terms - they are mutual traders. There are instances (for example, some five years later, the Lord President in the CIR v The Stonehaven Recreation Ground Trustees [1929] 15TC419 case - see BIM24210) where judges occasionally took an approach that is hard to reconcile with the current view, but never where it mattered.

In Cornish Mutual, at page 867 of 12TC, Viscount Cave explained what he thought the House of Lords had in mind in their decision in New York - see BIM24035.

‘I cannot help thinking that that very learned Lord [Lord Watson] directed his observations only to the real question before the House, namely whether there were taxable profits within the Income Tax Acts; and I cannot believe that he intended to decide that a company of this kind, simply because it was a mutual company, did not carry on any business at all.’

Therefore, as the term implies, and subsequent case law confirms, a prerequisite for mutual trading is that a trade is actually being carried on. Because mutual trading is a trading concept, you should not accept that it has any wider application, for example to income taxable as part of a property business or to savings and investment income. Salisbury House Estate Ltd v Fry [1930] 15TC266 confirms that the different heads of income in the Tax Acts are mutually exclusive so that any exemption from tax as trading income is not automatically extended to any other head of income.

There is specific statutory confirmation of the non-application of the ‘mutuality’ principle to property income at S260 Corporation Tax Act 2009 for Corporation Tax and S321 Income (Trading and Other Income) Act 2005 for Income Tax.