Personal bank statements are fair game

Andy Keates examines how much non-business information a self-employed taxpayer must provide to HMRC in response to an information notice.

The first tier tribunal (FTT) considered this point in Carol Holmes and Andrew Knight (TC06824).

Information notices

HMRC has the power (FA 2008, Sch 36 para 1) to issue a notice to a taxpayer requiring the production of information or documents if “reasonably required for the purpose of checking the taxpayer’s tax position”.

The taxpayer can appeal against a notice (or any part of a notice) on the grounds that the information is not reasonably required for that purpose.

The one exception is for information which forms part of the taxpayer’s “statutory records”: there is no right of appeal against such a request.

Statutory records are defined as any information or documents which the taxpayer “is required to keep and preserve under or by virtue of” the tax legislation. In turn, TMA 1970 s12B requires any person who has to make a self assessment return to keep and preserve “all such records as may be requisite for the purpose of enabling him to make and deliver a correct return”.

Facts

Holmes and Knight are the two directors of Seal Designs Ltd. Their 2015/16 tax returns showed income from employment and dividends, but both returns omitted some small amounts of interest.

As part of an enquiry into the returns, HMRC issued information notices requesting:

• All bank and/or building society books or statements for accounts into which any personal income or from which any personal expenditure was paid for the period 6 April 2015 to 5 April 2016.
• Certificates or statements of any investment accounts held personally such as ISAs or bonds, showing any interest received and movement of capital from 6 April 2015 to 5 April 2016. For each deposit into each investment account, a description of the source of funds.

The two directors provided certificates identifying a number of bank current accounts, savings accounts and a joint mortgage account, but objected to providing anything else and appealed against the notices.

Statutory records?

If the information and documents requested proved to be part of the directors’ statutory records, their appeal must fail.

However, the additional information being sought by HMRC would only qualify as a statutory record if there were any outstanding omissions in the tax returns. This could not be known for certain in advance since the whole purpose of asking for the information was to find out whether any such omissions existed!

The judge decided that HMRC did not have an absolute and unchallengeable right to call for these documents, as he couldn’t say whether the documents amounted to statutory records.

Reasonably required?

Information which is not part of the statutory record can only be called for if it is reasonably required for the purpose of checking the taxpayer’s tax position.

There is no firm judicial authority on who has the burden of proof in these cases. The judge decided to “assume, in the first instance and for present purposes only”, that HMRC should be required to demonstrate that the information was reasonably required.

Fishing allowed

In the case Spring Capital Ltd TC04220, it was found that HMRC is entitled to undertake ‘fishing expeditions’ when checking tax returns. The HMRC officer does not need suspicion in order to check a tax return.

All HMRC need do is show that their request for information is reasonable.

In this case, there was third-party evidence of a disparity between the directors’ declared income and their personal expenditure, including substantial capital injections made into their company.

There may have been an innocent explanation for these disparities, but equally, this could indicate an undeclared source of taxable income. It is part of HMRC’s legitimate enquiries to determine which of these is the case, and the judge considered it was not unreasonable for HMRC to call for documents which would shed light on the situation.

While there may well have been other ways in which HMRC could have chosen to check the returns, the one they elected to use is not “a disproportionate interference with the [directors’] right to privacy”.

The information was reasonably required and the appeals were dismissed.

Conclusion

The two directors were on a hiding to nothing so far as the “reasonably required” test was concerned: they had omitted income sources from their tax returns. It is, therefore, no surprise HMRC wanted to ensure there were no other omissions.

HMRC’s internal guidance,(EM1570) instructs: “you should only ask to see private bank statements at this stage if you can demonstrate their relevance to the return”. In this case, HMRC was able to do so.

Regrettably, as with the similar case of Joshy Mathew (TC04342), the FTT managed to resolve the appeal without addressing the issue of what belongs within the “statutory records” and who has the onus of proving it.