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Distinction between trading and investment companies

The distinction between trading and investment companies is important for a number of reasons. For instance, the rules relating to the expenses which are allowable for tax purposes can differ between the two types of company. Broadly speaking, trading companies are able to deduct allowable revenue expenses from trading income, and investment companies can deduct expenses incurred in managing investments. Further information regarding the deductibility of these types of expenses, together with details of exclusions, can be found in the Management expenses guidance note.

In addition to this, the options available for relieving excess management expenses also differ from trading loss relief, see the Excess management expenses guidance note.

Until 31 March 2004, an investment company was defined as ‘any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom’. Prior to this date, relief for management expenses was limited to companies satisfying