Annex 1: Minor Changes in the Law Change 55: Property income etc: priority of the charge on trade profits: the “Crown Option”: sections 287 and 982 and Schedule 1
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 4 or within a charge to tax in Part 10 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 or another Schedule of ICTA it is taxed under the alternative and not under Schedule D.
But there is no order of priority between Cases I, III and V of Schedule D. In the event of income falling within more than one of those cases it has long been accepted that HMRC have the option to choose under which case the income should be taxed.
The “Crown Option” was recognised for corporation tax in paragraph 84 of Schedule 18 to FA 1998. This was done, not so much to provide explicit statutory authority for the option, but to explain how it should operate under Self Assessment. That paragraph refers to the case where an amount may fall within Case I or within Case III or V of Schedule D. In such a case, an officer of the Board may determine which case shall apply as the basis of charge for an accounting period. But the paragraph does not set out on what basis the officer’s determination is made.
HMRC’s guidelines for making the determination are published in paragraph 14035 of the Business Income Manual. The income is taxed under Schedule D Case I and not under Schedule D Case III 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 287 provides that if income is capable of being taxed under Part 4 of this Act as profits of an overseas property business and under Chapter 2 of Part 3 of this Act as trade profits it is taxed under Part 3. ICTA taxes the profits arising from an overseas property business under Schedule D Case V so section 287 gives effect to the Crown Option for trades carried on wholly or partly in the United Kingdom (and to section 70A(1) of ICTA for trades carried on wholly abroad).
Section 982(1) gives priority to Chapter 2 of Part 3 of this Act if income falls within both Chapter 2 of Part 3 and Chapter 2, 5 or 6 of Part 10 of this Act. This gives effect to the Crown Option for income within Part 10 of this Act that is taxed in ICTA under Schedule D Cases III or V. 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 sections 21A and 70A of ICTA) that the profits of both types of trade should be calculated on the same basis.
Chapters 7 (annual payments not otherwise charged) and 8 (income not otherwise charged) of Part 10 of this Act include income charged under Schedule D Case III or V. But in both cases the income within these Chapters is income that cannot be taxed under another provision. So a specific rule ceding priority to Part 3 of this Act is not needed.
Schedule 1 to this Act repeals sections 12AE and 31(3) of TMA and paragraph 84 of Schedule 18 to FA 1998.
In principle, this change is favourable to some taxpayers and adverse to others because it allocates income to a specific head of charge. That head of charge may produce a different amount of income to be brought into charge or may facilitate the claiming or relieving of losses or other reliefs that are not available under the other charge. The rules applicable to income within Part 3 are generally regarded as more flexible and favourable than those applying to the heads of charge which would have applied but for this change.
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 generally accepted practice.