BIM24565 - Mutual trading: distributions: ICTA88/S490

Out of profits brought into charge to CT

Where a company carrying on a mutual trade makes a distribution to its members you need to establish if that distribution comes from the surplus from the company’s trading with its members or from trading with non-members or a mixture of both.

• Distributions out of a mutual surplus give rise to taxable receipts;
• Distributions out of taxable income give rise to non-taxable receipts.

ICTA88/S490 (1) ensures that the normal CT provisions only apply to distributions deriving from:

• profits that have been brought into charge to CT, or
• franked investment income.

ICTA88/S490 applies the Corporation Tax Distributions legislation (contained in ICTA88/S209 - see CTM15120 to:

• Profits which have been brought into charge to Corporation Tax, or
• Franked Investment Income.

Following on from this, ICTA88/S490(2) provides that the Corporation Tax provisions concerning distributions do not apply to distributions made to persons participating in the mutual activities of the life insurer and derived from that mutual life assurance business.

ICTA88/S490 (3) notes that a distribution by a company carrying on a mutual trade to a person participating in those activities is derived from the mutual activities does not change the character of the distribution for CT or IT in the hands of the recipient.

The result is that ICTA88/S490 applies the normal CT provisions concerning distributions to a mutual trader (whether the trade is mutual insurance or some other activity). In effect ICTA88/S490(3) makes clear, for example, that distributions to trading members out of mutual surpluses are trading receipts in the hands of the recipient to the extent that the distribution represents a return of payments made.

The reasoning behind this is that anything which is not a return of contributions must have arisen from the concerns non-mutual operations and will have been taxed in the hands of the concern.

ICTA88/S490 applies if a company has carried on a mutual trade or has never carried on a trade or a business of holding investments. In both cases, the distributions legislation is limited to such distributions as are made out of profits brought into charge to Corporation Tax or out of Franked Investment Income, that is income not derived from mutual trading.

The legislation is not specific as to the source of the sums to be distributed. The point is whether they have been subject to Corporation tax or not. Hence, any sums exempted from Corporation Tax under the Substantial Shareholdings Exemption would not be subject to the provisions of the distributions legislation.

A company that is limited by guarantee has no share capital. Where such a company makes a distribution to its members on a winding-up, the distribution is not excluded from the definition of ‘distribution’ in ICTA88/S233 (1) because it is not ‘a distribution made in respect of share capital in a winding-up’. To secure that companies limited by guarantee receive comparable treatment to companies limited by share capital, you should treat distributions in a winding-up by a company limited by guarantee as capital distributions.