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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: members' clubs: Tax Bulletin article

Members’ sports clubs

The subject of members’ clubs was discussed in an article in Tax Bulletin 32G, the text of which is now included below:


In the past the taxation of members’ clubs has usually been a straightforward matter. However, the increasing commercialisation of sport, evidenced for example by substantial business sponsorship and media coverage of events, can generate a range of tax issues where the answers depend not on any specific statutory enactment but on the application of general principles developed by the courts. In particular, an issue that frequently arises in these circumstances is to what extent a club’s increasingly commercial activities can give rise to taxable trading profits or allowable trading losses. In this article we attempt to outline the way this question needs to be answered.

The types of clubs we consider

We are concerned here with members’ clubs constituted, for example, as unincorporated associations or as companies limited by guarantee. Whatever their constitution these clubs are all chargeable under the CT regime.

On the other hand, this article is not concerned with clubs which take the form of companies incorporated with limited liability and ordinary share capital under the Companies Act. Their trading profits do not normally come within the mutuality exemption described later in this article.

Members’ clubs come in all shapes and sizes

At one extreme there are small members’ clubs used only by the members who come together for the non-commercial purpose of providing themselves with the facilities to play and watch a sport or for other recreational purposes. Any surplus such clubs generate from their transactions with members is unlikely to amount to a trading profit (and nor is any deficit tax deductible). It is sometimes said that the surplus in these circumstances is exempt on grounds of mutuality. However there is a simpler prior point here. Such activities do not normally amount to a trade because they lack the necessary commercial inspiration.

At the other extreme there are far more commercial concerns whose principal function is to offer the general public entertainment in watching the clubs’ sporting activities as well as access to bar and catering facilities and so on. The whole of such a club’s activities are likely to amount to a taxable trade.

Increasingly many members’ clubs find themselves between these two extremes. For example, their primary purpose may remain non- commercial but they may also have ancillary forms of trading income. These might be bar and catering sales to non-members or income from non-members for the use of club facilities such as golf clubs’ ‘green fee’ income from visitors using the facilities.

In some cases a club’s pricing policy may distinguish between members and non-members. For example, a golf club may charge one green fee to visitors (trading income) and a different (lower) green fee to members’ guests (non-trading income). However, often the club will provide its services and facilities to members and non-members alike on the same terms. For example, members and non-members may be charged identical admission prices to watch a football or cricket match.

The significant issues

The two issues which arise in this context are to what extent, if at all, a club carries on a trade and, if so, to what extent that trade is undertaken on a mutual basis. In practice we think it is helpful to consider the two points separately even if as a matter of strict law the two issues cannot be disentangled quite so cleanly.


The first issue which clubs and their advisers need to consider here is whether any of a club’s activities are undertaken in a sufficiently commercial way to constitute a trade. The well-known ‘badges of trade’ are relevant here but one particularly useful question to consider is whether the activities in question are broadly similar to those of an admittedly commercial undertaking, even though they are, perhaps, conducted on a smaller scale.

If no trading activities can be identified, then the further issues considered in this article do not arise.

If trading activity is identified it is then necessary to address two points.

The first point is the boundary between trading activities and non-trading activities. For example, it may be that transactions between the club and subordinate classes of members lack the element of commerciality necessary for them to be regarded as trading. This might be the case if associate members are subject to a lower fee or admission charge than that charged to the general public for the same facility.

Second, it is necessary to consider whether any part of a trading profit is not taxable (or a loss not allowable) on the grounds that it is referable to activities undertaken on a mutual basis. This concept is discussed further below.


The mutuality doctrine is one that has been developed by the courts over a long period. Its origin has been ascribed to the principle that one cannot make a taxable profit out of oneself.

For mutuality to apply there must be a class of contributors to a common fund who are also entitled, as a class, to share in the surpluses of that fund. By this we mean that arrangements must be in place whereby surpluses always come back to the class of contributors/participators. Individuals may continually be joining and leaving such a class without prejudicing this requirement but there must be a reasonable relationship between the contributions a participator makes and what he or she is entitled to receive both during the course of the business and on a winding up. Direct ownership of the common fund by such a class is not required. For example, a separate legal person may own the fund, typically a company limited by guarantee and having no share capital, so long as the class indirectly owns the fund through its control of the company.

The effect of the doctrine of mutuality is that any trading surplus which a club derives from transactions with such a class of contributor/participator is exempt from tax and, similarly, any loss or deficit cannot be relieved.

In considering whether all or some of the members of clubs with trading activities constitute such a class two particular points need to be borne in mind.

First, in the case of clubs constituted as unincorporated associations, general law may give members the right to a share in the common fund or surpluses on a winding up, even if the club’s rules are silent on the matter. On the other hand, where the club takes the form of a company, the company is a separate legal person and the members’ entitlement to return of surplus is not protected by general law. Therefore the entitlement must be explicit in the contract between the club and its members.

Secondly, while it may be clear that full members are within the circle of mutuality, it will be necessary to consider separately the position of subordinate classes of member, such as ‘junior’ or ‘associate’ members. The question is whether these people have the necessary rights to share in club surpluses so that any profits the club derives from commercial transactions with them (as noted earlier, some transactions with them may lack commercial inspiration and not be by way of trade) are also exempt.

Calculating taxable profit

Having determined that there is a trade and whether or not mutuality is in point so far as a class of contributors/participators in club surpluses are concerned it is finally necessary to calculate what part of the profit from a club’s activities is taxable.

Only non-mutual trading profits are chargeable to tax [as trade profits]. Hence, where a club carries on a trade that is wholly non-mutual it will be necessary to exclude any surplus attributable to non-trading transactions with members. In addition, where a club carries on a trade which is in part mutual and in part not, it will also need to exclude the surplus from mutual trading transactions. In the latter case the arithmetic can be done without seeking to distinguish any non-trading surplus from a mutual trading surplus because both are exempt from tax, albeit for different reasons.

Apportionment of income and expenses

To identify the taxable profit an allocation or apportionment of income and expenses is necessary. There are no hard and fast rules about how this should be done but the objective is to identify what is non-mutual trading income and to allow as a deduction the expenditure incurred in generating that income, calculated as accurately as possible. Some general guidance is given below.


Some income will be wholly non-mutual trading income. Examples might include television fees and sponsorship income.

Other income such as club membership subscriptions may not be trading income and may also derive wholly from members within the mutual circle. It should be matched with members’ club expenses and excluded from tax computations.

Match receipts, car-parking receipts and general bar takings will normally be trading income and may need to be split between that which is mutual, being derived from club members, and that which is non-mutual, deriving from non-members.

The tax treatment of income from some items, for example programme sales and outdoor catering, may depend on the arrangements put in place. If the club is itself responsible for the programme production and sale and outdoor catering at the event then the income should be apportioned as described in the previous paragraph. However, these and other functions are sometimes franchised to independent operators and in that case the whole of the franchise fee would be treated as trading income.


Expenses may need to be split correspondingly to allocate an appropriate proportion against the taxable and non-taxable sources of income. The principle applies to all expenditure though there is also a specific statutory rule regarding interest. [What is now S441, S442 Corporation Tax Act 2009] provide that no relief is available in respect of interest paid to the extent that the interest is attributable, on a just and reasonable basis, to that part of the company’s business which is not within the charge to CT.

If the same prices are charged to members and non-members, the expenses may be apportioned by reference to the income from the two sources where that is known or can be measured with reasonable accuracy. If different prices are charged then the apportionment would need to be weighted appropriately depending on the particular circumstances. For example, in the case of a members’ golf club, the weighting might be based on the total number of rounds played and the proportion of those which generate chargeable trading income. Any items of expenditure that relate solely to a specific category of income should be matched with that income.