A controversial aspect of enquiries by HM Revenue and Customs (HMRC) into personal tax returns is requests to see the taxpayer’s private bank statements.
HMRC’s extensive information and inspection powers apply (among other things) to documents which are "reasonably required" to check the taxpayer’s tax position (FA 2008, Sch 36 para 1). The question also arises whether private bank statements constitute ‘statutory records’. This is important, because there is no right of appeal if HMRC issues an information notice requiring the production of the taxpayer’s statutory records (Sch 36, para 29(2)). ‘Statutory records’ are defined as follows (Sch 36, para 62):
"(1) For the purposes of this Schedule, information or a document forms part of a person's statutory records if it is information or a document which the person is required to keep and preserve under or by virtue of—
(a) the Taxes Acts, or
(b) any other enactment relating to a tax..."
There are separate statutory record keeping provisions for VAT purposes (VATA 1994, Sch 11, para 6; SI 1995/2518, reg 31; see also VAT Notice 700/21 'Keeping VAT records').
Even if private bank statements do not form part of the taxpayer’s statutory records, as mentioned they can be requested if reasonably required.
In Beckwith v Revenue and Customs  UKFTT 181 (TC), HMRC opened an enquiry into the taxpayer’s 2008 self-assessment return. The taxpayer was a self-employed carpenter in the relevant tax year, and used credit cards for business and private expenditure. He had a private bank account from which he paid the balances due on his credit cards, and informed HMRC that some business payments (i.e. “bills”) were paid from the private account by cheque. HMRC stated that as the account had been used to pay business expenses, the bank statements formed part of the business records, and subsequently issued an information notice (under FA 2008, Sch 36, para 1) in respect of them, as well as for certain other information.
The taxpayer’s accountant argued with HMRC that payments by sole traders from their personal accounts represented capital introduced to the business, and that the private bank statements were therefore outside HMRC’s remit. HMRC contended that any account used to pay or receive business monies forms part of the business records. However, the taxpayer’s accountant maintained that there was no legal requirement to supply private bank documentation. Further correspondence between the parties did not resolve the dispute, and HMRC subsequently issued penalty notices. The taxpayer’s accountant replied to HMRC stating that FA 2008, Sch 36 cannot be used except in cases of fraud, and an appeal was lodged against the penalty notices.
A schedule was submitted to HMRC on the taxpayer’s behalf, showing amounts received into the private bank account relating to the business, together with “capital introduced into the business by way of payments made on behalf of the business.” The schedule disclosed between 7 and 11 business related transactions each month. HMRC sought an assurance from the taxpayer’s accountant as to the completeness of the schedule, which was given. However, HMRC did not withdraw or cancel the information notice, and HMRC asked the tribunal to uphold the notice and penalty notices.
The tribunal first considered whether the personal bank statements were statutory records. The tribunal noted that if a document is part of a taxpayer’s statutory records, he has no right of appeal against the notice. The tribunal also observed that over 90 business transactions went through the personal account during the year under enquiry, and stated “it is an operational part of the business, used for making regular payments of business expenses. The fact that this bank account also contains personal expenditure does not prevent the bank statements from being ‘business records’ and thus ‘statutory records’ within the meaning of Sch 36.” The tribunal held that the taxpayer’s personal account was a ‘business record’ and so formed part of his statutory records. The taxpayer therefore had no right of appeal against an information notice to the extent that it asked for the personal bank statements in question.
As the private bank statements were considered to be statutory records, it was not necessary to consider whether the statements were "reasonably required", but the tribunal went on to do so anyway. The tribunal held that the statements were reasonably required, notwithstanding that HMRC had accepted the schedule of private account business receipts and payments and personal assurance from the taxpayer's accountant did not change the position. The requirement to provide the private bank statements was reasonable at the time the notice was issued. The taxpayer's appeal against the information notices was dismissed.
The volume of business transactions in the private bank account was significant in Beckwith, although it would be interesting to speculate if that number was small in relative terms, or whether the tribunal's decision would have been different if there had only been a handful of business transactions through the private account. In any event, best practice for business owners would clearly be for private accounts to remain private, and not to undertake any business transactions at all through them.
Finally, it is worth noting that HMRC's Enquiry Manual comments as follows in relation to requests for private bank statements (at EM3560):
"No full private side examination can be undertaken without access to private bank account statements. Be sure to ask for copies or printouts of any e-bank accounts. You should not routinely call for them in the opening letter of an enquiry. Exceptional circumstances might be a voluntary disclosure of undisclosed business receipts into a private account. As your enquiry develops, if it becomes clear that the business records are not necessarily reliable, your need to see the private statements becomes greater. For example, you may find that drawings have not been fully recorded and you will need to see the private bank account statements to satisfy yourself that these are consistent with declared drawings, and other information provided."
Whilst HMRC's comments about needing to see private account statements to verify drawings are at least arguable, clearly it would be preferable to avoid this situation by ensuring that business records are complete as far as possible, are kept separate from private accounts, and (for HMRC's benefit, if nothing else) record drawings from the business.
Mark McLaughlin CTA (Fellow) ATT TEP