BIM24550 - Mutual trading & members clubs: distributions: introduction

Introduction and layout of the guidance

It follows from first principles that distributions out of the surpluses from mutual trading to members by a continuing mutual concern (corporate or non-corporate) are trading receipts where the member who receives them does so because of the trade they carry on - see BIM24555. In addition there are two statutory provisions:

ICTA88/S490

There is guidance at BIM24565.

ICTA88/S491

There is detailed guidance at BIM24600 onwards.

In Brogan v Stafford Coal & Iron Co Ltd [1963] 41TC305 the distribution made in winding-up by a mutual concern was found to be no less capital just because the company had previously carried on a mutual trade with its members. All of the members of the company were colliery owners. The company engaged in mutual insurance against employers’ liabilities. The company had accumulated substantial surpluses.

The mining industry was nationalised in 1947 and the company was liquidated and its assets were returned to members. The members did not include the returned contributions as receipts in their accounts. Lord Reid saw no reason to believe that a distribution in winding up by a mutual entity was any different from a distribution in winding up by a non-mutual entity - namely capital.

The decision was reversed by FA64/S21 (now ICTA88/S491) which charged to tax distributions in a winding up by a corporate mutual concern.

So distributions by mutual concerns (either in a continuing situation or on a winding-up) to their members are taxable in the member’s hands (provided that the member is carrying on a trade, profession or vocation).

The following guidance covers: