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B1.436 General principles of mutual trading

Mutual trade takes place if the persons carrying on a trade and their customers are the same persons. If there is mutual trade no taxable profit arises as a person cannot trade with themselves¹.

Any profit resulting from mutual trading is in effect the amount the participators have contributed in excess of what was needed. Such a profit is therefore regarded as their own money and returnable to them. In order that the profit is exempt from a charge to tax, it is essential that the profits should be capable of coming back at some time and in some form to the people who acquired the goods or services of the trading entity.

However, on the liquidation of a body corporate which carried on mutual business, distributions of profits from payments to the body, which were allowed as deductible expenses of the payer's trade, are treated as trading receipts. This is a necessary provision as a mutual society might otherwise be used as a tax-free reservoir for profits derived