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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: essential requirements: contributors to and participators in a surplus must be identical

An essential requirement is that there is complete identity, as a class, between the contributors to a mutual surplus and the participators therein. Lord Macmillan said, at page 448 in the case of Municipal Mutual Insurance Ltd v Hills [1932] 16TC430 - see BIM24025, that:

‘The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial.’

The requirement does not prevent members from coming and going

This does not mean that the individual contributors must always remain participators in a surplus, or that new contributors may not join the group. Upjohn J. commenting on the statement of Lord Macmillan, in the case of Faulconbridge v National Employers’ Mutual General Insurance Association Ltd [1952] 33TC103, made this point when he said, at page 125:

‘…I think it is clear that when Lord Macmillan speaks of the cardinal requirement being complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgement, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in in their place in the future.’

The following points emerge from Faulconbridge:

  • It is not necessary for surpluses to have been applied as reductions in premiums or as bonuses provided that it is intended that they will be so applied one day.

    ‘…the time has not yet arrived when any part of the surplus can be safely returned to the members…’

  • A changing and fluctuating individual membership does not matter provided that identity as a class is preserved.
  • Being a member of the company per se is not essential provided that the contributors (or the contributors as a class) get their surplus contributions back.

The last point is important. An attempt was made in S31 Finance Act 1933 to bring surpluses from mutual trading by a body corporate into the charge to tax. The section proceeded on the basis that it was membership or non-membership that determined if the activities were a mutual trade. The House of Lords showed in the Ayrshire Employers Mutual Insurance Association Ltd v CIR [1946] 27TC331 case (see BIM24027) that this was an incorrect view. What matters are the terms on which the transactions are undertaken.

From a practical point of view you may limit consideration to those who have been contributors at any time in the previous five years - see BIM24115.