Companies carrying on mutual business or not carrying on a business

Summary

This section deals with distributions made by a company carrying on mutual businesses or not carrying on any business. It provides that distributions made by such a company are not to carry tax credits except to the extent that the distributions are made out of profits charged to corporation tax or out of franked investment income. The section ensures that a tax credit is not given in respect of a distribution made out of a surplus arising from mutual trading as such a surplus does not attract liability to corporation tax. However, other income of a company carrying on a mutual trade, for example, bank interest or investment income, is liable to corporation tax and accordingly a tax credit attaches to distributions out of such income.

Details

(1) Where a company carries on a business of mutual trading or mutual insurance or other mutual business, the provisions of the Corporation Tax Acts and Schedule F relating to distributions (see section 20 and Part 6) apply to any distributions made by such a company but only to the extent to which the distributions are made out of the profits of the company brought into charge to corporation tax or out of franked investment income.

(2) Distributions by a mutual life office (for example, bonuses on policies) are not to be regarded as distributions. If the business includes the granting of annuities, the annuities are to be treated as charges only to the extent that they would be so treated if the company were not a mutual one. This ensures that the annuities are treated as charges on income only to the extent that they do not exceed the investment income of the annuity fund.

The fact that distributions are made out of the surplus arising from mutual activities is not to affect the character of the receipt for tax purposes in the hands of a member of that mutual concern participating in the mutual activities. It is provided in subsection (1) that the provisions of the Corporation Tax Acts and Schedule F relating to distributions (see section 20 and Part 6) apply to distributions made by a mutual trading company to its members but only to the extent that the distributions are made out of profits chargeable to corporation tax and franked investment income.

(3) The distribution provisions of Part 6 do not apply to the remaining part of any distribution. The balances of any such distribution, however, continues to rank as trading receipts where the recipient’s participation in the mutual business is an activity of a trade carried on by the recipient. An example would be a mutual fire and accident insurance company established by a group of traders to provide insurance in connected with their trading activities. Distributions out of the surplus of such a company would be regarded as trading receipts of those traders.

(4) In the case of a company which has never carried on a trade or has never carried on a business of holding investments and which was not established for those purposes (for example, incorporated members’ clubs), any distributions by such companies are to be treated as distributions for tax purposes only to the extent that they arise from profits charged to tax or from franked investment income.

Relevant Date: Finance Act 2021