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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: allowable expenditure: the ‘Peterhead’ principle

To compute equivalent commercial profit

In the case of British Legion, Peterhead Branch, Remembrance and Welcome Home Fund v CIR [1953] 35TC509 the weekly holding of public dances was held to amount to a trade within Case I of Schedule D.

The Fund, a local committee of the British Legion, held public dances weekly from June, 1944, to June, 1947, in the local drill hall. The Fund only paid a nominal sum for use of the facilities. All management services were given gratuitously by members of the Legion. The charge for admission was 2s. 6d. per head, but considerably more was often given by those who could afford it.

The proceeds were partly used to pay a sum to the British Legion Remembrance Trust Fund and another sum as a contribution towards the cost of erecting a local war memorial, and the balance was accumulated with a view to the provision, when practicable, of a local hall or club rooms for ex-members of the armed forces.

The Special Commissioners decided that the Fund was trading.

The Court of Session held that there was evidence on which the Commissioners could find that a trade was being carried on.

The question then arose as to the amounts properly deductible in computing the profits of the Fund’s trade. The court decided that the Fund should be allowed a deduction for the expenses that would have been incurred if the Legion had not provided facilities and services on a gratuitous or nominal basis.

The Lord President (Cooper) at page 514 of 35TC thought that whether the Fund was trading was a mixed question of fact and law. The taxpayer’s motives and the destination of any profits were irrelevant factors. What mattered was whether the activities were conducted on commercial principles.

‘The…question raises a mixed issue of fact and of law. In my view, a person cannot be said to be engaged in carrying on a trade or a concern in the nature of trade within the meaning of the Income Tax Acts unless, in a reasonable sense, he is conducting business on commercial principles. If he is so conducting business, it matters not from what motive he acts nor to what purpose he devotes the profits, if any. If he is not so conducting the business, enterprise or adventure - if, for example, he is merely using some of the trappings of trade as a means of procuring subscriptions or donations not properly related to any service he renders or to any commodity which he supplies - he may be wearing an easily penetrated disguise which deceives nobody, but he is not trading. Instances of the latter type of operation which readily occur to the mind are the hawking of flags, the conducting of occasional bazaars and sales of work and whist drives, and the showing of private gardens for an admission fee, usually exorbitant.’

The Lord President stressed that the Commissioners had found that the whole of the work of organising the dances and giving services at them was performed by members of the Legion without charge. There were at least ten present at each dance. If the dances had been run on an ordinary commercial basis, a hall being rented at a commercial rent and payment at ordinary rates being made for services, etc., the Special Commissioners had found that the surplus would have been very greatly reduced. The Lord President said that this finding could be read two ways, either:

  • the activity in question was not commercial, or
  • an adjustment was required to take account of the costs that would have been incurred had proper commercial rates been paid for the facilities and services provided free or at undercharge.

The Lord President (Cooper) at page 515 of 35TC was reluctant to overturn the Commissioners and sided with the latter view. The balance appearing to be tipped by the scale of the activities involved - at least one dance a week over a three-year period.

‘This finding certainly suggests that the enterprise was not conducted on an ordinary commercial basis, but was simply one form of the devices familiarly employed for extracting subscriptions and donations from the local public; but it is also capable of being read as merely importing that the actual receipts require to be considerably discounted, and such a discount has evidently been allowed in the reduced assessments actually made, for these assessments total £2,600 for the three years as against realised surpluses from the dances of nearly £6,000. The difficulty is created by the very large scale of the operations conducted by the Appellants, dances having been held once a week for three years, or over 150 dances in all.

It appears to me that the choice between trade or no trade must in every case involve a large element of fact and may be a question of degree. While the point is narrow and difficult, I have come with regret to be of opinion that there was evidence sufficient to justify the finding of the Special Commissioners and that they have not misdirected themselves in law, though I doubt whether I should independently have reached the same conclusion.’

Lords Carmont and Russell concurred. Lord Russell at page 516-517 of 35TC was also of the opinion that the motivation for and the destination of the fund raising were irrelevant. The issue was whether what had been done amounted to trading. The provision of gratuitous or under priced facilities and services had no bearing on that question but it did come into consideration when determining the quantum of profits. The Fund should be allowed a deduction to cover what it would have spent had commercial rates been paid for the facilities and services in question.

‘…I am of opinion that the object or motive of the promoters and the use to which the accrued profits will ultimately be put are not relevant.

Moreover, I doubt whether the fact that it got a cheap let of the hall and got gratuitous services at each dance is relevant to the question of trading, although that element may well be open for consideration in fixing the amount of profits properly to be taken as the trading profits truly accruing from the dances. In every case like the present the question becomes one of circumstance and degree. I am unable to affirm that there are no facts relevant to infer that the activities of the Fund in running the dances were conducted on business or commercial lines. In most respects indeed I consider that they were run substantially as a business of the kind run for private profit would be run. In that situation, it seems to me that there was evidence to support the Commissioners’ finding, and that there was no misdirection in law by which that finding is vitiated. I would therefore answer the first question in the affirmative, leaving open the further question, not yet debated, whether the Appellant Fund is entitled to exemption from Income Tax on the profits of the trade in terms of Section 30 of the Finance Act, 1921.’

The latter issue being one of charitable exemption.

You should recognise that this case involved unusual circumstances - a significant number of dances (more than 150) held weekly over a three-year period. Notwithstanding the number of events and the time period involved, the judges indicated that the case was borderline; some expressing the view that they would have gone the other way but, unable to say that the Commissioners had erred sufficiently, felt constrained to go along with their findings. Unless there is some other significant factor (for example commercial sponsorship, media funding, etc) it is unlikely that a Tribunal could be persuaded that a local annual fund raising event amounted to a trade.

At a practical level you should also bear in mind that the application of the principle approved of in the Peterhead decision can have a substantial effect in decreasing taxable profits where significant facilities or services have been provided gratuitously or at considerable undervalue - in Peterhead it was accepted the taxable profits were only just over one third of the declared surplus. This principle only applies in cases of the type considered in Peterhead.

See also BIM24794.