Beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: essential requirements: surplus must go back to contributors and to no one else

Arrangements must be in place to ensure that any surplus ultimately finds its way back to the contributors, with no arrangements for it to go to anybody else. Viscount Cave in Jones v The South-West Lancashire Coal Owners’ Association Ltd [1927] 11TC790, said at page 838:

‘Sooner or later, in meal or in malt, the whole of the association’s receipts must go back to the policy-holders as a class, though not precisely in the proportions in which they have contributed to them…’

The company was limited by guarantee. Its only activity was the mutual insurance of colliery owners against liability in respect of accidents to employees.

Viscount Cave’s comments concerning the proportions of returned contributions have been clarified in later cases where the courts have indicated that the amounts returned to a contributor should bear a reasonable relationship to the contributions made by that contributor.

This does not mean that the surpluses in the years prior to winding up have to be returned to contributors, either in the form of reduced contributions in the future or as a return of those contributions, merely that the intention is that any surplus will eventually be returned to the contributors. Upjohn J. in the Faulconbridge v National Employers’ Mutual General Insurance Association Ltd [1952] 33TC103 case, rejected the proposition that a requirement of mutuality was that a contributor must be entitled to share in the annual surpluses prior to winding up, when he said, at page 125:

‘The authorities show that the only essential conditions are that any surplus must ultimately come back to the contributors in meal or in malt on a winding-up or otherwise.’

An entity that includes in its rules/constitution/articles a requirement that in the event of a winding up any surplus is to go to an entity with similar aims or to a charity cannot be carrying on a mutual trade. The surplus at a winding up must go back to the contributors and to no one else. It does not matter that in practice the surplus only goes back to contributors, there must be no possibility of it going to non-contributors.

The requirement that the surplus must go back to the contributors does not preclude a mutual trader from, for example, making a donation out of its surplus to (say) a charity. But to retain mutual trading status such a donation would have to be approved by the contributors. The contributors in effect collectively agreeing to give away some of their own money.