There is no judicial guidance on apportionment of expenditure
when an activity is partly mutual and partly not. But there is
judicial guidance on apportionment where an activity is partly
within Case I of Schedule D and partly outside.
In his opening remarks the Master of the Rolls in the case of
The Carlisle and Silloth Golf Club v Smith [1913] 6TC198 indicates
that the club was not formed for the purpose of making profits. In
its dealings with its members the club was not carrying on a trade
and so this was not a case of mutual trading. The point at issue
was to establish the amount deductible where parts of the
entity’s activities were outside the scope of Case I and part
within. The Master of the Rolls, on the facts of that case, at page
199 expressed the view that:
…there is a real difference between moneys received from members and applied for the benefit of members, and moneys received by the club from strangers…Whether there have been any profits or gains is a matter of fact; and the answer will depend upon the mode in which the expenses of maintenance and other outgoings ought to be attributed to the visitors. This is really a question of fact for the Commissioners, and not for the Court…I agree, that the particular rule adopted by the Commissioners was wrong,…
The Master of the Rolls rejected the Commissioners’ method of apportioning expenditure (on a pro rata basis according to the comparison between income from members and income from non-members). The Master of the Rolls did not say that no maintenance expenditure should be deducted in computing the profits derived from trading with non-members. You should also note that the Master of the Rolls did not say that the correct basis to adopt was that of ‘marginal cost’ - that the club would incur maintenance etc expenditure in any event and so none can be said to be wholly and exclusively for the purpose of the trade with non- members. The Master of the Rolls approved Hamilton J’s approach in the High Court (see BIM24465).
