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HMRC internal manual

Company Taxation Manual

Corporation Tax: management expenses: investment company - principal part of income

For a company to be ‘an investment company’ it must satisfy both parts of the test in ICTA88/S130. The second part of the test is that the principal part of its income must be derived from the making of investments. For the purpose of this test any trading income to be included is the Case I profit (or loss) figure not the turnover. You should apply this test over a representative period.

There is no direct case law on this test. However there is parallel legislation in FA36/S20 which dealt with the apportionment of a company’s income amongst its shareholders, and you can look to this for guidance in the context of Section 130. The House of Lords considered this legislation in FPH Finance Trust Ltd v CIR 26TC131. It decided that it was not enough to consider one single year. It may be necessary to consider a longer period that more truly represents the character of a company’s income. This position was endorsed in MacNiven v Westmoreland Investments Ltd (WIL) 73TC1. Carnwath J said in the High Court …the Commissioners were correct to look at the activities of WIL over a longer period than the three years under review. 

However, there is an important difference between the legislation in that case and Section 130, which you must bear in mind and which is discussed below.

The definition of an investment company in FA36 was only in terms of the type of income. The judgements in the House of Lords in the FPH Finance case were concerned with two points:

  • first, the meaning of ‘income’, and
  • second, the period of time that should be taken into account.

Lord Porter said, at p156,

of course, if it be found that there has been a definite change in the type of business carried on, or in the method of carrying it on, so that the income of the company is thereafter derived mainly or entirely from investment or from non-investment income as the case may be, consideration of the previous earnings of the company may be ruled out. But in the present case until liquidation there was no such change. The company continued to carry on its dealing in stocks and shares as before.

So, even where the definition of an investment company was by reference to the type of income only, a change in the type of business carried on could affect the representative period. That will apply even more for the definition in Section 130, because the company’s business must consist wholly or mainly in the making of investments.