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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: mutual associations: specific activities: mutual health insurers: is the trade mutual?

The essential features for a trade to be mutual trading are set out at BIM24020. There is no relaxation of these criteria in the case of mutual health insurers. You should apply the tests in exactly the same way as you would to an entity carrying on any other activity. In particular you should ensure that any surplus must go back to the contributors and to no one else - see however BIM24675.

The larger funds tend to be companies limited by guarantee. The presence of a share capital does not, of itself, preclude a finding of mutual trading but it can cause considerable difficulties for the would-be mutual trader - see BIM24405.

The constitutions of a number of mutual health insurers meant that they could not be carrying on a mutual trade. Principally this was because of rules that precluded the contributors from controlling the insurer. Following discussions with the British Health Care Association (the body representing the majority of the insurers involved), it was agreed, that those mutual health insurers (who had hitherto been treated as mutual traders but whose rules on examination were found to be inconsistent with such treatment) could either:

  • accept that they were not carrying on a mutual trade (and so accept liability on all of their trading income, including from dealings with members), or
  • make the necessary changes to their rules/constitution to comply with the requirements for mutual trading.

HMRC did not seek to apply a change retrospectively or re-open ‘closed’ years. HMRC also allowed the changeover to take place from a convenient date; for example the beginning of the insurer’s next accounting period.

A health insurer who adopted the first alternative above may at a future date (and for commercial reasons) wish to amend their constitution/rules to conform to the requirements for mutual trading. Where there are sound reasons for so doing the change may be accepted without further enquiry. Any case where the change appears to be designed to secure a tax advantage should be critically examined.