The First-tier tribunal decision in the case of Miss Mead Ali v The Commissioners of HMRC (published on 22 May 2012) will provide advisers with comfort that HMRC cannot automatically assert that unidentified deposits into a client’s bank account(s) should be treated as undeclared income.
It is standard procedure when HMRC conduct an enquiry to ask to see the bank statements, whether the client is a company, partnership or individual. The purpose of this exercise is to see whether there are any deposits that may not have come from declared sources of income or gains.
In Miss Ali’s case she had allowed her family to deposit monies into her bank accounts and when her affairs were reviewed by HMRC they asserted that the unidentified deposits should be taxed as undeclared income.
Miss Ali, quite rightly, disagreed with HMRC’s assertion and appealed against the discovery assessments and amendments raised by HMRC.
The First-tier tribunal found that Miss Ali was a truthful and careful witness who had provided detailed explanations as to the sources of the funds deposited into her personal bank accounts. On that basis, her appeals were allowed and what is key here is that Miss Ali was able to discharge the burden of proof on her to show that the deposits were not undeclared income.
Where advisers find that HMRC are contending that unidentified deposits should be treated as undeclared income it is essential, in the first instance, to collate any available documentation (from third parties or family members) to explain the source of the funds. In reality, there are always occasions (especially between family members) where funds are deposited into a bank account and no thought is given to obtaining any documentation to clarify the source of the funds.
Miss Ali’s case demonstrates the benefits of gathering together the information to explain the source of the funds to discharge the burden of proof. If the family member provides a statement to confirm that they were the source of the funds or is willing to be a witness then this may be sufficient to persuade HMRC or the Tribunal that on the balance of probabilities the appellant has explained the source of the funds. It is certainly worth undertaking this exercise when HMRC initially assert that the unidentified deposits are undeclared income, as it demonstrates to HMRC and the Tribunal that this is the source of the funds and not just a reason for the deposit.
When advisers deal with enquiries into the clients’ affairs it is unfortunately common for HMRC to focus on what appear to be immaterial transactions that occurred some time ago. It is rarely ‘black or white’ but normally grey, which leaves the adviser with the difficulty of persuading HMRC that the unidentified deposits should not be taxed. In our experience, it is key to understand and clearly communicate the background and history to the transaction in order to limit the client’s exposure.