Taxation in the United Kingdom/Corporation tax/The schedular system of corporation tax

In the United Kingdom, something is only taxed if there is a specific provision taxing it. If there is no such provision, it is not taxed. For instance, if someone, other than your employer, gave you £100 as a gift, then you will not be taxed on it.

The specific provisions applying to the taxation of income have their history in the 18th century, when income tax was introduced. There were a number of Schedules to the Income Tax Act that raised different charges on different sorts of income. Two of these still remain, and it is only if income falls within one of these Schedules that it falls to be taxed. The Schedules are:

  • Schedule A (which deals with income from UK land); and
  • Schedule D (which deals with all income that is taxable, but which doesn't fall within Schedule A).

The Schedules are defined (more obviously now than in the past!) so that any source of income can fall within at most one Schedule. This has been confirmed by case law.

The Cases of Schedule D

Schedule D is itself divided into a number of Cases. Four of these still remain[1]:

  • Case I - tax in respect of any trade carried on in the United Kingdom or elsewhere but not contained in Schedule A
  • Case III - tax in respect of (i) items falling within the loan relationship legislation taxed under Case III by virtue of Chapter II of Part IV of the Finance Act 1996; (ii) any annuity or other payment which is payable in respect of anything other than a loan relationship (Essentially Case III covers non-trading interest-type income)
  • Case V - Overseas income (apart from that falling within Case III)
  • Case VI - tax in respect of any annual profits or gains not falling under any other Case of Schedule D or Schedule A[2]

The definitions of the Cases of Schedule D do not allow income to fall within both Case VI and one of the other Cases. Nor, because of the way Case V is defined can a source of income fall within both Case III and Case V. However, a source of income can fall within Case I and one of Cases III or V. This could happen, for example, when you have a UK-resident company that has a trade in the UK and overseas. Income from that foreign trade falls within Case I (as it is trading income), and within Case V (as it is overseas income). Where income falls both within Case I and one of Cases III and V, it is only taxed once, and HM Revenue and Customs decide which Case to tax under[3]

Chargeable gains

In addition to being taxed on their income, companies are also taxed on any chargeable (ie capital) gains they make that are not taxed under the provisions relating to income (Schedule A and Schedule D).[4] What constitutes a chargeable gain is defined in the Taxation of Chargeable Gains Act 1992.

Loans to participators of close companies

When a loan is made to a participator of a close company, there may be an additional charge made to corporation tax as a result. Roughly, a close company is a company controlled by five or fewer participators (normally just shareholders, but it can include large loan creditors), or controlled by its directors - though for a full definition, and for more information about this charge and other provisions relating to close companies, see Taxation in the United Kingdom/Corporation tax/Close companies.

Controlled foreign companies

A charge may be made on a company in certain circumstances in respect of profits made by a foreign company it has an interest in. The charge to tax here is not within the Schedular system. The controlled foreign company provisions fall under the "anti-avoidance" banner.[5] For more information, see Taxation in the United Kingdom/Corporation tax/Anti-avoidance/Controlled foreign companies.

Preceding page: Residents and non-residents
Next page: Accounting periods


  1. Technically there is also a Case II, which taxes profits in respect of any profession or vocation not covered by another Schedule. However, as "trade" for corporation tax purposes includes these, it is not thought possible for a company to be charged to tax under Case II. The rules for Case II are almost identical to Case I in any instance.
  2. Section 18 of the Income and Corporation Taxes Act 1988
  3. Paragraph 84 of Schedule 18 to the Finance Act 1998 sets out the rules. The taxpayer must provide to HMRC any relevant documents HMRC require to make their decision. HMRC are likely to choose to tax under whatever Case gives the higher tax liability, and case law suggests that they are obliged to do that. In practice, under self assessment, the company will prepare its tax return on the basis it wishes to adopt, and will only change it if later required to do so by HMRC.
  4. Section 6 of the Income and Corporation Taxes Act 1988 and Section 8 of the Taxation of Chargeable Gains Act 1992
  5. Section 747(3) of the Income and Corporation Taxes Act 1988