This is a company carrying on trading activities which does not include ‘to a substantial extent activities other than trading activities.’

Non-trading activities may include investment in property, share portfolios, bonds etc.

Excess cash deposits may point to a non-trading activity. Where cash is being accumulated for future use in the trade then the company will be classed as trading.

HMRC use the phrase ‘substantial extent’ by which they mean more than 20%. They apply the 20% test to:

Turnover – does investment income exceed 20% of total turnover?

Balance sheet – are more than 20% of the assets of the company held as investments?

Expenses – do more than 20% of the expenses relate to non-trading expenses?

Directors’ time – do the directors spent more than 20% of the time managing non trading activities.

Cash held on deposit may not involve much ‘activity’ in managing it and this can also indicate trading.

Where the cash surplus arises from the sale of a trade or business assets prior to liquidation then ER can still be claimed but the distributions must be made within 3 years of the sale of the assets. .