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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: allowable expenditure: apportionment of mixed expenditure

S34(2) Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), S54(2) Corporation Tax Act 2009 (CTA 2009)

The statutory rules for calculating the taxable profits of a trade allow for the deduction of any part or proportion of expenses incurred partly for the purposes of the trade and partly for some other purpose which can be identified as incurred wholly and exclusively for the purposes of the trade. This rule has been expressly incorporated in the statute only recently, but is intended to follow existing case law and established practice.

For example, in Korner and Others v CIR [1969] 45TC287 Lord Upjohn tells us at page 297G:

‘This practice [apportioning expenditure] is very old, works great justice between the Crown and the subject, and I trust will never be disturbed. Thus, speaking generally, the grocer living above his shop, the doctor who has a surgery in his house and the barrister who works in his house where he keeps or brings his law books and works on his briefs in the evenings and at weekends is allowed by the Crown a reasonable sum in respect of the necessary upkeep of his dwelling as being properly attributable to his trading or professional activities.’

In Wildbore v Luker [1951] 33TC46 Roxburgh J said at page 51:

‘The Attorney General has not asked me to say that if some part of the rates are for private purposes the whole must be disallowed; he has not asked me to say that. I think it is possible that on a literal construction of the Rule [what is now S34(1) ITTOIA 2005 and S54(1) CTA 2009] that might be the result but it has never been the practice and the Attorney-General has not asked me to say so.’

And in McLaren v Mumford [1996] 69TC173 at page 184I Rimer J described a part of the Revenue’s argument as:

‘For the Crown, Mr Brennan submitted that the expenditure in this case served a dual purpose, both private and business, and that although S74(c) refers expressly to apportionment of expenditure (in relation to rent) it has long been the practice of the Revenue to accept that, in circumstances such as the present, an apportionment such as that directed by the Commissioners can properly be made.’

There is no judicial guidance on apportionment of expenditure when an activity is partly mutual and partly not. But there is judicial guidance on apportionment of the expenditure of a members’ club where an activity is partly within the charge to tax on trade profits and partly outside.

In his opening remarks the Master of the Rolls in the case of The Carlisle and Silloth Golf Club v Smith [1913] 6TC198 indicates that the club was not formed for the purpose of making profits. In its dealings with its members the club was not carrying on a trade and so this was not a case of mutual trading. The point at issue was to establish the amount deductible where parts of the entity’s activities were outside the scope of the charge to tax on trade profits and part within. The Master of the Rolls, on the facts of that case, at page 199 expressed the view that:

‘…there is a real difference between moneys received from members and applied for the benefit of members, and moneys received by the club from strangers…Whether there have been any profits or gains is a matter of fact; and the answer will depend upon the mode in which the expenses of maintenance and other outgoings ought to be attributed to the visitors. This is really a question of fact for the Commissioners, and not for the Court…I agree, that the particular rule adopted by the Commissioners was wrong,…’

The Master of the Rolls rejected the Commissioners’ method of apportioning expenditure (on a pro rata basis according to the comparison between income from members and income from non-members). The Master of the Rolls did not say that no maintenance expenditure should be deducted in computing the profits derived from trading with non-members. You should also note that the Master of the Rolls did not say that the correct basis to adopt was that of ‘marginal cost’ - that the club would incur maintenance etc expenditure in any event and so none can be said to be wholly and exclusively for the purpose of the trade with non-members. The Master of the Rolls approved Hamilton J’s approach in the High Court (see BIM24465).