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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: judicial guidance on apportionment

In the case of The Carlisle and Silloth Golf Club v Smith [1913] 6TC48 & 198 Hamilton J rejected the so-called ‘marginal cost’ approach. Addressing the problem of determining the quantum of assessment, Hamilton J tells us at page 58:

‘…it was suggested that possibly the gross amount of the green fees would be the sum in respect of which the assessment should be made; because there was no finding at any rate that the whole of the items on the debit side would not have been incurred just the same for the members if there had been no visitors. I need not decide that contention, because it does not seem to me to be really before me; but I should hesitate long before I accepted it. It appears to me that the profits must be the real profits, the net profits, and that can only be arrived at after ascertaining whether there is not, as one certainly would expect there would be, something to come off the gross before arriving at the net sum.’

Hamilton J therefore gives no support to the view that as the costs of providing golfing facilities would have been incurred in any event no allowance for such expenditure is available in computing the amount of the taxable profits arising from the club’s dealings with non-members.

Hamilton J tells us at page 58 of 6TC that the case has to go back to the Commissioners to ascertain:

‘…what is the real apportionment of the total expenses of the club on common items which falls to the visitors and does not fall to the members.’

Hamilton J also tells us at page 56 of 6TC:

‘…I think if it were worth while to incur the expense it would be possible by taking the experience of the working of this or similar clubs over a period of years, and by examining the number of persons of each class using the club and the links and the times of the year at which they do so and the numbers at particular times in which they congregate together, to ascertain with real arithmetical accuracy what proportion of the club’s gross expenditure upon house and grounds is attributable truly to the user by the visitors in respect of which the green fees are receivable.’

Clearly Hamilton J sees no difficulty in apportioning ‘common’ items or expenditure on ‘house and grounds’. In practice you will need to establish all the facts as to how the entity in question organises its affairs, what expenses relate solely to members, what expenses relate solely to non-members and how the ‘mixed’ expenses may reasonably be apportioned.

An approach that has proved useful in the case of members’ golf clubs is described in BIM24470. The members’ golf club is not conducting a mutual trade with its members; rather it is not trading at all. But the principles behind the apportionment mechanism are equally applicable to mutual traders who also trade with non-members.