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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: essential requirements: return of surplus contributions

Need for a reasonable relationship between the contribution and the distributable surplus

Despite Viscount Cave’s comments in Jones v The South-West Lancashire Coal Owners’ Association Ltd [1927] 11TC790 (see BIM24110) that the return of a surplus need not be in proportion to the contributions, the weight of judicial authority shows that there must be a reasonable relationship between the amount a person contributes and the amount distributable to them.

There is no requirement that the surplus or part thereof must go back to the contributors as and when the surplus arises. The requirement is that on a winding up the surplus goes back to the contributors. Lord Wilberforce made this point in the case of Fletcher v ITC (1972 AC 414) (see BIM24235) when he said:

‘It may not be an essential condition of mutuality that contributions to the fund and rights in it should be equal; but if mutuality is to have any meaning there must be a reasonable relationship, contemplated or in result, between what a member contributes and what, with due allowance for interim benefits of enjoyment, he may expect or be entitled to draw from the funds: between his liabilities and his rights.’

There is no need to work out the exact amount due to all contributors, both current and past. You may accept that an entity satisfies this condition if the return of contributions only takes into account current contributors and those who ceased to be contributors within the last five years.

The proportion returned to each contributor (current and past) must bear a reasonable relationship to the contributor’s (or former contributor’s) contribution to the surplus. But where the trader offers a variety of goods or services to contributors with different profit margins, a return that simply reflects the amount spent by each contributor may not reflect their contribution to the surplus. A contributor who purchased fewer services but at a higher margin may make an equal or greater contribution than a contributor who made greater volume of purchases at a lower margin. Each case will therefore need to be approached from the viewpoint of the facts that relate to the nature of the transactions that the entity conducts with its own members.