It is said to be one of the characteristics of the British that they will take any opportunity to form a club. This article looks at the taxation of Members’ Clubs.
Members’ Clubs v Proprietary Clubs
Some clubs are commercial enterprises, run for a profit, and are subject to the normal rules for taxation of business profits – think of a nightclub, or a professional football club, for example. These are known as “proprietary clubs”.
Other clubs are run for the benefit of their members, and while they may make a profit, in many cases that profit is not taxable.
Ownership and Membership
The simplest rule of thumb to distinguish between these two types of club is whether the ownership of the club is different from the membership. If this is the case, it is likely that the club will be a commercial enterprise, run to make a profit for the owners out of its dealings with the members.
Other clubs are owned by their members, in the sense that all the assets of the club belong to the membership, and so do the profits.
It is a basic principle of taxation that you cannot make a taxable profit by trading with yourself, and this means that in the case of a club which is owned by its members and which exists to provide them with (for example) sports facilities, any profit made from the fees paid by the members is not liable to tax.
I belong to a small local clay pigeon shooting club. Every member pays an annual subscription and an additional fee each time they come to shoot at our ground. Members can bring their friends as guests, but the member bringing the guest is responsible for paying their guest’s fees. We try to set our fees to produce a modest profit each year, which is spent on buying new equipment, and any surplus above that is converted into alcohol and drunk at the two club dinners we hold each year – again, the dinners are for members and their personal guests only. Our rules state that if the club were to be dissolved, its assets are to be distributed between the members at that time – in fact this would be the case under general law, but we have it in our rules just to avoid any doubt. Club policy is decided by a vote of all the members at the (usually acrimonious!) Annual General Meeting.
This is a typical example of “mutual trading”, and our club is not liable to tax on the income it makes from its activities.
How far does mutuality go?
It is possible for a club’s activities to be partly mutual trading (exempt from tax) and partly normal trading (taxable). If, for example, my shooting club were to be open to anyone other than members and their personal guests, then we would be liable to tax (corporation tax, in fact, because a club like ours is classed as an “unincorporated association”) on any profit we made from our trading with those non-members. It would be necessary to apportion the running costs of the club between the members and the non-members, to arrive at a figure for the taxable profits.
There is a trap here that some clubs fall into – in an attempt to preserve their “mutual” status whilst making a few pounds out of the general public, they introduce such concepts as “temporary membership”, where a member of the public pays a small fee for a membership lasting (say) 24 hours, and is then allowed to use the club’s facilities. HMRC take the view that this is not enough to bring the temporary member into the magic circle of “mutuality”, and any profit made from dealings with those temporary members is taxable.
Keep it mutual
If you are involved in a club like mine, and it need not be a sports club -it could be, for example, a local amateur history society, a writer’s group, a group dedicated to restoring an old traction engine, or any other such spare time activity - then in order to benefit from the exemption from tax for mutual trading, you need to make sure of the following points:
- The club must be owned by its members, which means that the club’s assets must belong to them all. This is normally the case under general law if the club is not formed into a company, but some clubs are set up as “companies limited by guarantee” – in this case the mutuality principle must be made explicit in the rules for membership.
- In the same way, any “profits” the club makes must be used for the benefit of all the members of the club – for example, to buy new equipment, or to pay for social occasions open only to the membership.
- The club must not allow non-members to use its facilities. It is, however, acceptable for members to bring genuine personal guests, providing the member pays any fees for the guest. Be careful not to abuse this rule – if a member is allowed to “sign in” someone off the street so that they can use the facilities, then you have strayed beyond the boundaries of mutuality.
- Do not use a conventional limited company with share capital as the vehicle for the club – such a company generally cannot comply with the mutuality rules. A company limited by guarantee (see first bullet point above) can, however.