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HMRC internal manual

Business Income Manual

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HM Revenue & Customs
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Meaning of trade: mutual trading and members clubs: deductibility of payment made by contributor to a mutual trader

The case of Thomas v Richard Evans & Co Ltd [1927] 11TC790 established that a contributor’s payments to a mutual trader were deductible for tax purposes even if there was the possibility of those payments being returned.

A colliery company made payments to an association for the mutual insurance of its members against liability for compensation in respect of fatal accidents to their employees. The payments were found to be deductible in full notwithstanding that the payments were partly applied in accumulating a fund that might, in certain events, be returned to members.

The Master of the Rolls, Lord Hanworth, saw no reason not to allow the deduction of the premiums paid:

‘…but upon the facts before us it is plain that these sums are paid for the purpose of obtaining insurance and for nothing more, and that there is no reason to cut down the cost of this insurance below the sum which has actually been paid by the members of the Association, that is, in this particular case, Messrs. Richard Evans and Company, Limited. For these reasons, in the first case it appears to me plain that these sums so paid are properly deductible as part of the costs of seeking the profits and gains which are the subject matter of and chargeable to Income Tax.’

In suitable cases there is a possibility of challenging the quantum of deductions claimed by a contributor for payments made to a mutual trader on ‘wholly and exclusively’ lines. Lord Evershed commented at page 335 in the case of Brogan v Stafford Coal & Iron Co Ltd [1963] 41TC305 that:

‘If… a mutual insurance company were established as a means to secure the building up of large capital assets, I cannot think that the annual payments would be allowed as a trading expenses because they were called insurance premiums, or at least would not be allowed to the extent that in truth and in fact they were not properly so required.’

Where such a challenge is being considered refer the matter to CTISA (Technical).