BIM24015 - Mutual trading: introduction: basic considerations

What you need to establish

Mutual trading is an important concept. This is because a mutual trader is not liable to pay tax on trading profits that arise from their mutual trade. The reverse of the coin is that they do not get relief for trading losses arising from and capital allowances on assets provided for their mutual trade.

There is no statutory definition of mutual trading. The term is used in the Taxes Acts, for example ICTA88/S490 (see BIM24550) and ICTA88/S491 (see BIM24600) but is not specifically defined. Rowlatt J. gave the classic definition of mutual trading in Municipal Mutual Insurance Ltd v Hills [1932] 16TC430 - see BIM24025.

When considering the taxation position of an entity that claims that the whole or part of its profits is exempt from tax on the basis that it carries on a mutual trade the following considerations apply.

• Firstly you need to establish that the entity is indeed a mutual association. An example of a mutual association is a village cricket club. A number of individuals come together and provide funds to further their enjoyment of cricket, and perhaps compete in a local league. The members of the cricket club put up funds and associate together to achieve a common aim. The mutual association will have a set of rules or constitution (not necessarily written) that governs the relationship between the members and the association. (Detailed guidance is at BIM24020 onwards).
• Secondly, you need to establish whether the entity is carrying on a trade. The mutual association does not have to carry on a trade but where it does so the question of mutual trading may arise. The issue is important because the profits from a mutual trade do not attract tax as trading income. (Detailed guidance is at BIM24045).
• Thirdly you need to establish whether the entity is trading with non-members. A mutual trader may as part of their trade have dealings with non-members. The profits arising from trading with non-members do not escape tax on the basis of mutual trading. Where such dealings amount to a trade, any profits arising are taxable in the normal way. The issue is then one of apportioning income and expenditure between the mutual and non-mutual sides of the trade. (Detailed guidance is at BIM24450 onwards).
• Finally, you need to establish whether the entity has any other income or gains. mutual trading is purely a trading income concept. A mutual association does not enjoy a general exemption from tax. The exemption does not, for example, extend to property income; notwithstanding that property income is more closely aligned with trading income by the changes in FA98. There is specific statutory confirmation of this at ICTA88/S21C for Corporation Tax and ITTOIA05/S321 for Income Tax. So a mutual trader’s profit from carrying on a Schedule A business is taxable in the normal way.

A mutual trader is also liable to tax on any chargeable gains that arise.

An entity that carries on a mutual trade with its members is not liable to tax as trading income any profits arising therefrom. In like manner any losses arising are not deductible either from other profits or gains of the period or from profits or gains of any other period. An entity carrying on a mutual trade cannot claim capital allowances on plant and machinery or industrial buildings used in the mutual trade.

The guidance that follows covers: