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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Meaning of trade: mutual trading and members clubs: members’ clubs: distinction between proprietary and members’ clubs

Does the club carry on a trade with its members?

Proprietary clubs

Where the club is a proprietary club, that is the ownership of the club rests other than with the general membership, the profit earned from providing goods or services to its members is not exempt from tax under the rule mentioned in the first paragraph of BIM24205.

Members’ clubs

A members’ club is one where ownership of the club and its assets rests with the general membership who control the club and its dealings. Such control may be exercised through an elected committee.

The case of CIR v The Eccentric Club Ltd [1925] 12TC669 extended the doctrine that there is no trading in a social context to the activities of a body corporate incorporated for the purpose of operating a members’ club. The club was a company limited by guarantee. The club was formed to provide a social club and refreshment for payment for members. The club was purely a members’ club and the members of the club and the members of the company were identical. No non-members were admitted.

Warrington L J said that the company did not carry on a business with a view to profit as an ordinary commercial concern. In substance the company was an ordinary members’ club not a proprietary club. Warrington L J highlighted the distinction between a proprietary club and a members’ club when he said, at page 696 of 12TC:

‘The club proprietor, whether an individual or a company, carries on a business with a view to profit as an ordinary commercial concern…the Company in the present case is a convenient instrument or medium for enabling the members to conduct a social club the objects of which are immune from every taint of commerciality…What is in fact being carried on, putting technicalities aside, is a members’ club and not a proprietary club,…’

Warrington L J draws a clear distinction between a members’ club and a proprietary club. The Judge’s comments are simply an extension of the kitty example in BIM24020.

Sargent L J took the same line. In substance this was an ordinary members’ club, which existed solely for the supply to their own corporation of the ordinary amenities of a social club. This distinguished the club from a trading concern. Sargent L J goes on to note, following the Styles v New York Life Insurance Company [1889] 2TC460 case (see BIM24035), that there was a complete identity between the providers and the receivers of the social amenities. That is to say a complete identity between the members of the company and the members of the club. So, because there was effectively only one party to the transactions, the process of providing social amenities could not be trading. The club was not outside the charge on trade profits because of mutual trading; it was outside the charge because it was not trading at all.

Lord President Clyde, in CIR v Stonehaven Recreation Ground Trustees [1929] 15TC419, restated the principle, at pages 426 and 427:

‘An ordinary social or playing club to which its members subscribe - and some of whose advantages may perhaps only be enjoyed by members in respect of further payments - presents another instance of a mutual association, whose privileges are confined to the members, and which does not therefore carry on a trade. Any balance to the good on its accounts is really in no different position from a balance shown on the accounts of a housekeeper for a private householder who may happen to have supplied the housekeeper with more cash than the expenses of the year turn out to require.’

You cannot isolate particular facilities of a members’ club

In the case of The National Association of Local Government Officers v Watkins [1934] 18TC499, the trade union bought a holiday camp to be used by members and their families. For the 1931 summer only, bookings were accepted from families who had visited it before the union acquired it and who had already booked to return. Union members and their families accounted for about two thirds of the Camp occupancy and non-members one third. The union’s rules required that any profits be applied for the benefit of all members, not just those who used the camp. The Revenue argued that all of the profits were taxable; the union, that only the portion derived from non-members was taxable.

Finlay J. accepted the union’s contentions. The Judge said that it was of crucial importance that the union was an unincorporated association, which put it in the position of a club. In turn, this meant that there could be no transaction of purchase and sale among the members. Accordingly the surplus from members was not a trading profit. The surplus from non-members was however a trading profit.

The really important point is that the transactions with members were social or recreational in nature so that there was no trading with members. The nature of the body is of secondary importance. The decision would be the same in a case where a body corporate takes the place of the union. You should not place any great reliance on those passages in Finlay’s judgement that imply that the decision turned on the status of the association. They should not be quoted or relied upon out of context.

The case also demonstrates that it is not possible to isolate particular activities or facilities that a members’ club offers to its members, for example a bar, and argue that that element constitutes a trade. Finlay J. made this point, at page 506 of 18TC:

‘I cannot think that you can, in the case of a club, isolate the dining room, the library, or the other various facilities which are offered by the club. The truth of the matter is, I think, that the members own the whole.’

Members’ club making its facilities available to non-members

This does not, of course, prevent members’ clubs from carrying on a taxable trade when they provide facilities to non-members on a commercial basis. This was the case in The Carlisle and Silloth Golf Club v Smith [1913] 6TC48 & 198. Indeed, the quote of Lord President Clyde in the CIR v The Stonehaven Recreation Ground Trustees [1929] 15TC419 case, referred to above, actually continued at page 427:

‘If, on the other hand, a club admits outsiders to its privileges or some of them for payment, it may lose its character as a mutual association either altogether or at least as regards its receipts from outsiders.’

You should note that the Judge also envisages that the admission of non-members to a members’ club may so change the character of the entity that it altogether loses any mutual element. Such cases are likely to be the exception. The issue being essentially a question of fact.