My client is the finance director of a trade protection association who has just been appointed secretary of his local yacht club. The yacht club organises regattas that only members can enter and owns a small marina which members only can berth at for an annual fee. He mentioned that visiting yachts can berth on a daily basis and he understands that this income plus investment income is taxed, and has asked for an explanation of the difference between this and the tax treatment for a trade association.
Answer
HMRC’s Company Taxation Manual at CTM41205 confirms that trade associations are within the charge to corporation tax. There are three classes of trade associations, namely:
those which exist to watch the general interests of members;
those which provide a specific service; and
those which exist for the purpose of maintaining prices.
Ordinary trade protection associations, formed to protect the common interests of their members and funded by their annual subscriptions, are normally non-trading concerns without trading income. In this case, any surplus arising on activities with members (i.e. the excess of subscriptions over costs) will not be taxable. Any other trading profits, non-trading profits, property business income and capital gains will be taxable in the normal way.
A member of a trade association which exists to watch the general interests of traders is entitled to deduct such part of the association subscription as is applied by the association towards expenditure which would have been admissible as a deduction had it been incurred by the member directly (see Lochgelly Iron and Coal Co Ltd v Crawford (1913) 6 TC 267). Unless there is other evidence, effect cannot be given to a member’s right to deduction without the production of the association’s accounts (see Grahamston Iron Co v Crawford (1915) 7 TC 25).
A trade protection association where members’ subscriptions are not otherwise chargeable to corporation tax may make an application to adopt an arrangement with HMRC under which:
members’ entrance fees, subscriptions, levies and other payments other than loans or payments of a capital nature are allowed in full in their corporation tax computations as deductions;
payments which the association makes to members, other than loans or payments of a capital nature, are to be treated as their trade receipts; and
the association agrees to be assessed to corporation tax as trading income on any surplus of receipts over expenditure, in respect of UK members.
Mutual concerns
The characteristics of a mutual trade can be found in CTM40960:
For a body to be engaged in mutual trading, there must be:
complete identity, as a class, between the contributors to the mutual surplus and the participators therein;
arrangements which ensure that the surplus ultimately finds its way back to the contributors and no arrangements for it to go to anybody else;
a reasonable relationship between the amount a person contributes to the surplus and the amount distributed to them on winding up; and
arrangements which place control in the hands of the contributors to the common fund.
A body will not pass the tests for mutual trading if its legal framework does not include these rules.
There is no statutory definition of mutual trading and the concept has developed through case law. The case of Ayrshire Employers Mutual Insurance Association Ltd v CIR (1946) 27 TC 331 confirmed that no tax had to be paid on surpluses from mutual trading. This is as a result of the principle that one cannot make a taxable profit out of oneself. If a group of people join together for a common purpose, their transactions with the umbrella body can be seen as mutual if:
the body’s legal framework passes the tests for mutuality; and
its transactions are with customers who are also members and accord with its legal framework.
A body’s legal framework will be set out in its constitutional documents, rules or contracts. A body engaged in mutual trading will only be free from tax on its trading activities. It will remain taxable on all other income and gains, including income from property or bank interest, without relief for management expenses. No relief is available for losses made on mutual trading, and no capital allowances are available on capital expenditure.
If a body has customers who are not entitled to receive back surplus amounts they have contributed to the common fund, its transactions with them are not mutual. Tax has to be paid on those transactions in the usual way as trading income. If the amount of trade that is not mutual is very small, it will not affect the tax treatment of the mutual trading. Bodies may therefore have some trading transactions and some non-trading transactions.
Conclusion
Both trade associations and mutual traders are generally not chargeable to tax in respect of transactions with members. Any other trading profits, non-trading profits, property business income and capital gains will be taxable. Therefore, in respect of the yacht club in the query, members’ annual subscriptions and mooring fees are not chargeable to corporation tax; but any investment income and berthing fees from non-members is taxable after taking into account the cost of providing the facility to non-members.
My client is the finance director of a trade protection association who has just been appointed secretary of his local yacht club. The yacht club organises regattas that only members can enter and owns a small marina which members only can berth at for an annual fee. He mentioned that visiting yachts can berth on a daily basis and he understands that this income plus investment income is taxed, and has asked for an explanation of the difference between this and the tax treatment for a trade association.
Answer
HMRC’s Company Taxation Manual at CTM41205 confirms that trade associations are within the charge to corporation tax. There are three classes of trade associations, namely:
those which exist to watch the general interests of members;
those which provide a specific service; and
those which exist for the purpose of maintaining prices.
Ordinary trade protection associations, formed to protect the common interests of their members and funded by their annual subscriptions, are normally non-trading concerns without trading income. In this case, any surplus arising on activities with members (i.e. the excess of subscriptions over costs) will not be taxable. Any other trading profits, non-trading profits, property business income and capital gains will be taxable in the normal way.
A member of a trade association which exists to watch the general interests of traders is entitled to deduct such part of the association subscription as is applied by the association towards expenditure which would have been admissible as a deduction had it been incurred by the member directly (see Lochgelly Iron and Coal Co Ltd v Crawford (1913) 6 TC 267). Unless there is other evidence, effect cannot be given to a member’s right to deduction without the production of the association’s accounts (see Grahamston Iron Co v Crawford (1915) 7 TC 25).
A trade protection association where members’ subscriptions are not otherwise chargeable to corporation tax may make an application to adopt an arrangement with HMRC under which:
members’ entrance fees, subscriptions, levies and other payments other than loans or payments of a capital nature are allowed in full in their corporation tax computations as deductions;
payments which the association makes to members, other than loans or payments of a capital nature, are to be treated as their trade receipts; and
the association agrees to be assessed to corporation tax as trading income on any surplus of receipts over expenditure, in respect of UK members.
Mutual concerns
The characteristics of a mutual trade can be found in CTM40960:
For a body to be engaged in mutual trading, there must be:
complete identity, as a class, between the contributors to the mutual surplus and the participators therein;
arrangements which ensure that the surplus ultimately finds its way back to the contributors and no arrangements for it to go to anybody else;
a reasonable relationship between the amount a person contributes to the surplus and the amount distributed to them on winding up; and
arrangements which place control in the hands of the contributors to the common fund.
A body will not pass the tests for mutual trading if its legal framework does not include these rules.
There is no statutory definition of mutual trading and the concept has developed through case law. The case of Ayrshire Employers Mutual Insurance Association Ltd v CIR (1946) 27 TC 331 confirmed that no tax had to be paid on surpluses from mutual trading. This is as a result of the principle that one cannot make a taxable profit out of oneself. If a group of people join together for a common purpose, their transactions with the umbrella body can be seen as mutual if:
the body’s legal framework passes the tests for mutuality; and
its transactions are with customers who are also members and accord with its legal framework.
A body’s legal framework will be set out in its constitutional documents, rules or contracts. A body engaged in mutual trading will only be free from tax on its trading activities. It will remain taxable on all other income and gains, including income from property or bank interest, without relief for management expenses. No relief is available for losses made on mutual trading, and no capital allowances are available on capital expenditure.
If a body has customers who are not entitled to receive back surplus amounts they have contributed to the common fund, its transactions with them are not mutual. Tax has to be paid on those transactions in the usual way as trading income. If the amount of trade that is not mutual is very small, it will not affect the tax treatment of the mutual trading. Bodies may therefore have some trading transactions and some non-trading transactions.
Conclusion
Both trade associations and mutual traders are generally not chargeable to tax in respect of transactions with members. Any other trading profits, non-trading profits, property business income and capital gains will be taxable. Therefore, in respect of the yacht club in the query, members’ annual subscriptions and mooring fees are not chargeable to corporation tax; but any investment income and berthing fees from non-members is taxable after taking into account the cost of providing the facility to non-members.
.tmb-editorspic.jpg?sfvrsn=df04ab27_1)
