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HMRC internal manual

Business Income Manual

Meaning of trade: mutual trading and members clubs: mutual associations: specific activities: bulk buying groups: basic principles

The basic approach for the taxation of bulk buying groups that act as principal rather than merely as agent for the members derives from the decision in a Privy Council case, English & Scottish Joint Co-operative Wholesale Societies Ltd v The Commissioners of Agricultural Income Tax, Assam ([1948] 19 AC 405). The utility of Privy Council decisions is described at BIM24235.

The society was incorporated in the UK under the Industrial and Provident Act 1893. The society owned an estate in Assam where it grew and blended tea, virtually all of which was sold to member societies at ruling market prices. The following passage from the judgement describes the position:

‘…their Lordships are of the opinion that the [mutual trading] principle cannot apply to an association, society or company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed from its members or from others, and sells its produce or goods to its members exclusively. In the present case the appellant company is not bound by its rules to sell its tea only to its members, but it could make no difference if it were. No matter who the purchaser may be, if the society sells the tea grown and manufactured by it at a price which exceeds the cost of producing it and rendering it fit for sale, it has earned profits which are, subject to provisions of the taxing act, taxable profits.’

The emphasis on the society’s independent status (and in particular the repetition of ‘own’) shows that a clear contrast is drawn between a society or company that acts as a principal and one that in the words of the immediately preceding passage is ‘no more than a convenient agent’.