8.10.2 Mutual trading
Mutual trading is where members form a co-operative society in order to conduct trade for their mutual benefit. Examples include purchasing co-operatives and marketing co-operatives, where members come together to buy or sell goods and services, using the co-operative as a conduit, or agent, for their trade. Any surplus generated from this trade belongs to members in proportion to the amount of trade they have conducted through the co-operative.
A co-operative society engaged in mutual trading is not liable for corporation tax on its surpluses, as long as it satisfies four essential requirements set down by HMRC. The first of these requirements is that any surpluses must go back to the members who contributed to that trade, and no one else. Community benefit societies cannot engage in mutual trading because such societies are required to be of benefit to the broader community and not just members. However, co-operative societies can satisfy this requirement if their trading activities are restricted to members only and the society in question acts as the agent, not the principal, in all transactions.
The other three requirements are that contributors to and participants in the surplus must be identical, that the return of surplus contributions must be proportionate to those contributions, and that members must control any common funds. The last of these requirements accommodates the co-operative principle that part of any reserves must be indivisible if members have control over these common funds.
Mutual trading could be relevant to any co-operative society that trades exclusively with its members, and does not trade with non-members or accounts for trade with non-members on a separate basis. This could include a consumer co-operative where customers must become members of the co-operative before they can use its services.
HMRC interprets mutual trading in a slightly different way when it involves a members’ club providing social and recreational activities. Any club incorporated as a co-operative or community benefit society is regarded as a members’ club for tax purposes. When members buy goods and services through the club, and if these activities are restricted to members only, and any surplus arising from these activities belongs to members, then HMRC do not regard this trading, but merely the consumption or use of the members’ own property.
For detailed guidance on mutual trading see HMRC Company Taxation Manual CTM40950.
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