Investment income (plus other non-trading gains and losses) is treated differently from trading profits on the Corporation Tax Return (unless it happens to be trading income in its own right). The following types of gains and losses must be disclosed separately:
- bank interest
- other investment income
- income from UK land and buildings
- exchange rate gains/losses on monetary assets and liabilities
- gains/losses on most derivative contracts
- certain types of overseas income and expenses
- chargeable gains/losses on the disposal of assets
With the exception of dividends, all the gains and losses mentioned above are taxed at the same rate as trading profits, so in that sense they make no difference at all to your corporation tax liability. However, if you make any losses in these areas, you can only offset them against trading profits from the same accounting period (apart from deficits on the disposal of assets or investments which can only be offset against chargeable gains). If these are insufficient to absorb such losses, they can only be offset against gains in other accounting periods arising from non-trading activities.
Generally speaking there is no corporation tax at all on dividends from other companies for the very good reason that those other companies have already suffered corporation tax on the profits the dividends were paid out of. Such dividends are known as franked investment income and are disclosed elsewhere on the Corporation Tax Return. Until 30th June 2009 franked investment income was restricted to qualifying distributions from UK resident companies, but dividends from foreign companies are now also included. Therefore, all dividends should now be deducted from accounting profits in your corporation tax computation.