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HMRC internal manual

General Insurance Manual

Mutual insurance: mutual insurance as a trade: severability of mutual and non-mutual business

A company may carry on some activities which plainly fall within the description of mutual business, and some which do not. Where the mutual activity falls short of trading then that activity can clearly be severed from a non-mutual trading activity for tax purposes (see Carlisle & Silloth Golf Club v Smith (1913) 6TC48). Similarly there would be no difficulty in separating two activities in a case where they constitute separate trades. All insurance activity is, on case law principles, a single trade - Last v London assurance Corporation (1884) 2TC100, but by statute (ICTA88/S431H) general and life insurance activities are treated as separate trades.

Difficulties arise where activities carried on by a mutual body constitute a single trade, as will almost be inevitably be the case with a mutual insurer, and different conditions apply to different parts of the business. For example, the mutual insurer may not wish (or may not be authorised) to write a particular line of business, but is willing to put members who require cover in touch with another insurer, from which it receives commission. This is consistent with a trading activity, but is not mutual in nature. On the footing that mutuality is a ‘reasonable relationship’ concept (see GIM9010) this type of commission is treated as a receipt of an income nature separate from the mutual trade and as miscellaneous income (CTA09/S979) after deduction of any expenses specifically referable to it. A similar approach applies to receipt of commission from the underwriting of new issues of shares.

Where the activity has the characteristics of a mutual trade, but some policyholders are excluded from any entitlement to participate in surplus, the ‘junior members’ approach described at GIM9020 may apply and their existence disregarded for the mutual test. Where non-mutual underwriting activity is minor in relation to the mutual activity it is similarly disregarded. If, however, there is significant regular activity different in character from the main body of the trade, for example the writing of non-mutual reinsurance business by a company whose core business is mutual direct insurance, a decision will be needed on whether the business can be divided into mutual and non-mutual parts, or whether the partial breakdown of the identity between the contributors and participators infects the entire business with non-mutuality.

There is no decided case law on the question of division, although the outcome in Municipal Mutual (GIM9010) was that the company’s fire insurance business was treated as mutual whilst its employers’ liability business was held to be non-mutual. It will be a question of fact whether or not the necessary division can be made between the mutual and non-mutual elements.

The question whether an insurance company is trading on a mutual basis will be decided when it starts to trade, and the decision will only need to be revisited where

  • there is a change in the company’s constitution, or the way in which it does business, which calls its status into question
  • there are indications of tax avoidance (see GIM9140)
  • it becomes evident that an error has been made, or
  • the company asks for a review.

Although underwriting and the investment of funds compose a single trade of insurance - Liverpool & London & Globe Insurance Co v Bennett (1913) 6TC327 - the inherently non-mutual nature of investment is not treated as piercing the circle of mutuality (GIM9010).

‘Health mutuals’ raise special issues - see GIM9120+.