The Co-operatives, Mutuals and Friendly Societies Bill is currently passing through parliament. The government has announced that it is supporting this legislation seeking to protect the assets of mutual entities, by making them non-distributable and only available for prescribed purposes.

What is a 'mutual entity'?

Mutual entities are organisations run for and by their members. In particular, they include friendly societies, co-operatives and mutual insurance companies.

  • Friendly societies: these are organisations where the members contribute to a fund that is used for the purpose and activities of the society itself.
  • Co-operatives: these are organisations run by their members, operating for the good of their members and often the local community. 
  • Mutual insurance companies: these tend to be registered friendly societies, which since 1993 have to be incorporated in order to be registered. These societies are used to provide insurance services to their members.

How are they taxed?

All of the above are unincorporated associations (with the exception of incorporated mutual insurance companies, already falling within the scope of Corporation Tax). As such they are taxed as corporate entities. The rules on when these entities are subject to tax are complicated. Some of the key principles are:

  • Income from mutual trading (trading between society members) is non-taxable. This is based on the principle that 'a man cannot trade or deal with himself'.
  • Equally such trading does not get relief for trading losses or qualify for capital allowances.
  • Non-mutual trading and chargeable gains are taxable.
  • Unregistered friendly societies are exempt from tax where income or chargeable gains do not exceed £160.
  • Organisations operating a 'basic life and general annuity business' (BLAGAB) only, have a limited exemption for member policies in relation to life assurance and annuity contracts (subject to statutory limits).
  • Non-BLAGAB contracts or mixed insurance businesses are subject to Corporation Tax.
  • Earnings and receipts received by members, from their share in the organisation, are taxable.

What is the issue?

Whilst many mutual entities are small and serve local communities, some are much larger and have existed for many years, accumulating valuable assets. In a mutual form, these assets are protected, however, if a mutual entity is incorporated the assets are then available to be sold or distributed out to the shareholders.

If passed, the new legislation will protect members' wishes over time, who have contributed to the entities to serve the greater good. This was the argument advanced by some during the eventually rejected takeover of LV= (Liverpool Victoria, the insurer) by US private equity firm Bain Capital in 2021. Upon Royal Assent, those campaigners will be reassured that this proposed legislation will protect those mutual assets. Mutual entities will be able to specify assets that will only be available for the prescribed purposes of the entity. This will effectively allow for an 'asset lock'.

Useful guides on this topic

Mutual trading, members clubs and community trades
How are mutual traders, members' clubs, associations and community trades treated for tax purposes?

External link

HM Treasury supports Private Members' Bill on Co-operatives, Mutuals, and Friendly Societies


Small acorn
If you like our content come and join us.

Thousands of accountants and advisers and their clients use www.rossmartin.co.uk as their primary TAX resource.

Register with us now to receive our FREE weekly SME Tax News update.