Corporation Tax: Trading vs Non-Trading Income

Understanding the difference between trading and non-trading income is essential for calculating your company's Corporation Tax correctly. These two types of income are taxed in the same way, but they're treated differently when it comes to claiming reliefs, carrying forward losses, and offsetting expenses—which can significantly affect your overall tax position.

What counts as being active for Corporation Tax purposes

HMRC considers your company to be 'active' for Corporation Tax purposes when it's engaged in business activities. This includes:

• Carrying on a trade or professional activity
• Buying and selling goods with a view to making a profit
• Providing services
• Earning interest
• Managing investments
• Receiving any other income

Being active for Corporation Tax purposes doesn't necessarily match the definition used for other taxes like VAT, or by Companies House, or under various accounting standards. Each organisation uses slightly different criteria.

Trading income explained

Trading income is revenue generated from your company's core business operations—the activities you set up the company to carry out. This includes income from:

• Selling goods or products
• Providing services to customers
• Professional activities such as consultancy or contracting
• Manufacturing or production activities

The key characteristic of trading income is that it comes from active business operations where you're buying, making, or doing something with the intention of making a profit.

Non-trading income explained

Non-trading income is revenue your company receives that doesn't come from its main business activities. Common examples include:

• Interest earned on business bank accounts or savings
• Rental income from property your company owns (unless property rental is your main trade)
• Dividend income from investments
• Income from managing investments

Your company might receive both trading and non-trading income in the same accounting period. Both types are subject to Corporation Tax, but they're handled separately in your tax calculations.

When your company is dormant for Corporation Tax

HMRC considers a company 'dormant' for Corporation Tax purposes when it's not active, not liable for Corporation Tax, or not within the charge to Corporation Tax. This definition differs from the Companies House definition of dormancy.

Your company may be dormant if it:

• Has been newly formed but hasn't yet started trading
• Is an 'off-the-shelf' company waiting to be sold
• Exists only to own an asset such as land or intellectual property
• Has previously traded but has now stopped all business activity
• Is destined to be removed from the Companies Register

Note that you can carry out certain 'pre-trading activities' or incur 'pre-trading expenditure' before officially opening for business without HMRC deeming you to have started trading. These include preliminary activities like writing a business plan or negotiating contracts, and preliminary costs incurred while deciding whether to start a business.

Special rules for clubs and unincorporated organisations

HMRC may treat clubs and unincorporated organisations as dormant for Corporation Tax purposes even if they're active, provided:

• The organisation's annual Corporation Tax liability doesn't exceed £100
• The club or organisation runs exclusively for the benefit of its members

For each year of dormancy, the organisation must not have any allowable trading losses for which it wants to claim relief, assets likely to be disposed of that would create a chargeable gain, or interest or annual payments from which tax is deductible.

HMRC won't treat certain organisations as dormant, including privately owned clubs run as commercial enterprises for personal profit, housing associations, registered social landlords, trade associations, thrift funds, holiday clubs, friendly societies, or companies wholly owned by charities.

If HMRC proposes to treat your organisation as dormant, they'll write to you and won't send a 'Notice to deliver a Company Tax Return'. They'll review this status at least every 5 years.

Your obligations to HMRC

You must tell HMRC within 3 months of starting your tax accounting period if your limited company is within the charge of Corporation Tax and is now active. The easiest way is through HMRC's online registration service using your company's Government Gateway user ID and password.

If you haven't informed HMRC that your company is dormant, you'll still be required to submit a Corporation Tax return. Failure to do so may result in penalties.

Sources

• Corporation Tax: trading and non-trading

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.