Annex 1: Minor changes in the law made by the Act: Change 66: Priority of the charge on trade profits: the “Crown Option” and sections 261, 366 and 575
This change gives priority to the charge on trade profits if an item of income is both a trade receipt and potentially within the receipts of an overseas property business in Part 3, or within a charge to tax in Part 4 or 5 of this Act.
In the source legislation taxable income is allocated to different Schedules. The charges under these Schedules are mutually exclusive.
In addition, a small number of charges (non-schedular charges) are imposed outside the schedular system.
The scope of Schedule D is set out in section 18 of ICTA. The effect of that section (and the relevant case law) is that Schedule D is the residual Schedule. If income meets the conditions to be taxed under Schedule D and the conditions to be taxed under ITEPA 2003 or another Schedule of ICTA it will be taxed under the alternative and not under Schedule D.
But there is no order of priority between Cases I to V of Schedule D. In the event of income falling within more than one of those Cases it has long been accepted that the Inland Revenue has the option to choose under which case the income should be taxed. This “Crown Option” was not legislated until 1996 when section 28A(7B) was inserted into TMA 1970. This was done, not so much to provide explicit statutory authority for the option, but to explain how it should operate under Self Assessment.
In 2001 section 28A(7B) of TMA was replaced by section 9D of TMA. It provides that if a self-assessment return is made and alternative methods are allowed for bringing amounts into charge the Inland Revenue may determine which alternative is used. The decision of the Inland Revenue is final and conclusive.
Section 9D(2) of TMA provides that the cases where the Tax Acts allow for alternative methods for bringing amounts into charge are under either:
	Schedule D Case I or II; or
	Schedule D Case III, IV or V.
The Inland Revenue’s guidelines for making the determination are published in paragraph 14035 of the Business Income Manual (BIM 14035). The income will be taxed under Schedule D Case I or II and not under Schedule D Case III, IV or V.
This Act deals with the Crown Option by providing for an order of priority between the Parts if income is capable of being taxed under more than one Part.
Section 261 provides that if income is capable of being taxed under Part 3 of this Act in respect of an overseas property business and under Chapter 2 of Part 2 of this Act it is taxed under Part 2. ICTA taxes the profits arising from an overseas property business under Schedule D Case V so section 261 gives effect to the Crown Option in respect of trades carried on wholly or partly in the United Kingdom (and to section 65A(1)(b) of ICTA in respect of trades carried on wholly abroad).
Section 366(1) gives priority to Chapter 2 of Part 2 of this Act if income falls within both Part 2 and Part 4 of this Act. This gives effect to the Crown Option in respect of income within Part 4 of this Act that is taxed in ICTA under Schedule D Cases III, IV or V. It goes beyond the Crown Option in that it gives Part 2 of this Act priority over income that would be taxed under Schedule F or as a non-schedular charge. It applies the same approach to trades carried on wholly abroad as is applied to trades carried on wholly or partly in the United Kingdom. This is consistent with the law (see section 65(3) of ICTA) and practice that the profits of both types of trade should be calculated on the same basis as far as possible.
In the case of income taxed under Schedule F the statutory authority for this approach is given by section 95(1) of ICTA (applied to trades carried on wholly abroad by section 65(3) of ICTA) .
In the case of non-schedular charges it is unlikely that there would be any overlap for income tax payers. But in theory it is possible that, for example, stock dividends (Chapter 5 of Part 4 of this Act) and gains from contracts for life assurance (Chapter 10 of Part 4 of this Act) may rank as trade receipts. Taxing such income under Part 2 of this Act accords with the policy and practice of taking trade receipts into account in calculating trade profits and not otherwise.
Part 2 of this Act provides for a charge on the profits of professions and vocations as well as a charge on the profits of trades. So section 366(1) goes beyond the ambit of ICTA by giving priority to Part 2 of this Act if the source legislation gives priority to income taxed as a trade receipt or under Schedule D Case I. For example, section 56(2) of ICTA (rewritten as section 551 (transactions in deposits)) excludes income taxed as a trade receipt from the charge under Schedule D Case VI. Paragraph 1(2)(a) of Schedule 5AA to ICTA (rewritten as section 555 (disposals of futures and options involving guaranteed returns)) excludes income taxed under Schedule D Case I or V from the charge under Schedule D Case VI . Taxing such income under Part 2 of this Act accords with the policy of taking receipts into account in calculating Schedule D Case I or II profits, although the point is most unlikely to arise in practice in relation to a profession.
Section 575 gives priority to Part 2 of this Act if income falls both within Chapter 2 of Part 2 (trade receipts) of this Act and Part 5 of this Act. In this case the only possible overlap is with income that could be taxed under Schedule D Cases III and V. So the order of priority gives effect to the Crown Option.
The order of priority in sections 366(1) and 575 allows sections 9D, 12AE(2) and 31(3) of TMA to be repealed.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.