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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: mutual associations: specific activities: agricultural co-operatives: three points to watch

In the context of mutual trading you need to consider the following three issues:

  1. If the co-operative purchases produce from the growers, and sells to third parties, the profits derive from trading with third parties and not from trading with its own members. Those profits do not therefore derive from mutual trading. If the co-operative merely finds buyers on behalf of its members and receives a fee from its members for doing so, the surpluses derive from the service supplied to its members and are therefore mutual. Some co-operatives’ accounts may show purchases and sales, but examination of the members’ marketing agreement will usually reveal that these figures represent the produce handled as agents by the co-operative on behalf of members.
  2. Sometimes a co-operative may allow a person (who may or may not also be a contributor as described above) to make use of a part of the facilities (for example - a co-operative which harvests members’ crops may hire out some machinery when it is not required for the co-operative’s own mutual trade).

Such use of surplus capacity for a fee (whether by a non-contributor to the mutual operation or a contributor):

* is not within the mutuality arrangements described above,
* creates a source of income chargeable to tax, and
* does not render the person concerned a contributor by virtue of that transaction alone.
  1. There used to be a trend for members of co-operatives to attempt to exploit the exemption from tax on profits arising from mutual trading. A typical arrangement was for six members of a co-operative to form a company; the company then became the seventh member of the co-operative. The six members marketed their own produce through the co-operative but the seventh, the company, marketed the produce of non-members. Alternatively, the six members made use of the co-operatives’ facilities for their own produce, while the seventh undertook to make them available to non-members for their produce. It was argued that all the co-operatives’ profits were exempt from tax on the basis of mutual trading, because all trading was done with members. We do not accept this contention.

Where the six members obtained facilities for their own use, or for their own produce, and the seventh obtained them for the use of non-members or for the produce of non-members, HMRC did not accept that the activities were truly being conducted in a mutual spirit. The share of any surpluses returned to the members embraced two elements:

* a share of the surplus derived from payments made by the members as members, and
* a share of the surplus derived from payments made by the seventh member as agent for the non-members.

This means that one of the essential conditions of mutual trading - that what is returned to each contributor is the surplus of their own contribution - was not met.

You should however note that where the seventh member became the owner of the produce so as to put it on an equal footing with the other members, HMRC accepted that the co-operative was operating on a mutual basis providing that the charges imposed on each of the seven members were the same, and that the basis of distribution of surpluses among the members was the same, so that there was no question of surpluses being diverted from the seventh member via the co-operative to the other six members.