BIM14035 - Schedule D: Crown option to choose between Cases I to V of Schedule D

Although Cases I to V of Schedule D define specific classes of income they are not exclusive. Income can fall within more than one Case and, where it does, case law has established that the Crown has the right to choose the Case under which the charge shall be made (the 'Crown option'). For example interest income could, on the facts of a particular case, be taxable under-

• Case I as trading income, or
• Case III as interest, or, if the source is foreign,
• Case IV or V as income from foreign securities or foreign possessions respectively.

Judicial support for the Crown's right to choose between the cases of Schedule D is found in Scottish Mortgage Co of New Mexico v McKelvie [1886] 2TC at page 172; The Liverpool and London and Globe Insurance Co v Bennett [1913] 6TC at pages 368 and 376; and Butler v The Mortgage Co of Egypt Ltd [1928] 13TC at page 812.

In practice the Crown option will normally be relevant only to interest income and to dividends arising abroad. BIM40800 onwards explains how to identify interest and dividend income to which the Crown option applies and how to exercise the option.

It is not clear from the authorities whether or not the Crown option described above is dependent on the Inspector's right to raise the assessment to tax and whether therefore the option remained available to the Board's officer on the transfer of the assessing function to the taxpayer under self-assessment. Legislation was therefore enacted in FA96 to ensure that the Inland Revenue could continue to determine the appropriate head of charge under self-assessment.

Crown option under self-assessment

The provisions effectively preserving the option are now in TMA70/S28A (7A) and (7B). They apply in cases where amounts of income may be correctly brought into account in a return either under Case I (or II) of Schedule D or alternatively under Cases II, IV or V. In those circumstances sub-section 7A gives the Board's officer the right, in the course of an enquiry into a return (or into an amendment to a return), to determine which of the alternative methods should be used. There is no right of appeal against such a determination.

These provisions apply for Income Tax for 1996-97 and subsequent years of assessment. For Corporation Tax they apply to accounting periods ending on or after the 'appointed day' (determining when self-assessment takes effect for Corporation Tax).

The guidance in BIM40800 onwards continues to apply under self-assessment to the identification of income within the Crown option and to the head of charge to be chosen.

TMA70/S28A (7A) and (7B) also preserve under self-assessment a parallel Crown option for companies carrying on life assurance business.

CASE VI - NO OPTION

The Crown option has no application to Case VI which is exclusive because it will not come into play until all the other Cases have been considered.

CASE VI - ALTERNATIVE ASSESSMENTS

Assessments under Case VI can, in some circumstances, be made as alternatives to Case I or II: see BIM22035.