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Private records: are they ‘private’?

Ian Roberts examines the powers HMRC has when it comes to your and your company’s documentation

A request by HMRC for records will relate to a compliance check of some description. At one extreme it may be a dozen dividend vouchers are sought to validate an entry in a tax return or, at the other, non-business bank statements for several years will be requested to move forward a tax fraud investigation into a substantial business. HMRC’s powers to obtain such information are very wide but they are finite.

HMRC officers have significant powers to obtain information through FA 2008, and in particular Sch 36. See also HMRC Compliance Check factsheet 2 issued when an information notice is given (HMRC Leaflets, Factsheets and Booklets).

Powers to obtain documents

At the outset of any check the HMRC officer will typically make an informal request for information and usually suggest a date by which this information should be supplied. This will normally be 30 days from the date of the letter requesting the information: see HMRC’s Enquiry manual (EM) at EM1580. If the deadline is not met then the next step is often the immediate issue of a taxpayer notice requesting the information.

HMRC’s Compliance Handbook (CH) at CH223100 gives examples of when a formal notice might be appropriate. As well as cases where informal requests have been refused they also cover cases where:

  • there is a history of non-compliance and HMRC have reason to believe that information will not be provided if requested informally;
  • an informal request is likely to cause an unacceptable delay;
  • pre-approval of a taxpayer notice is appropriate, for example when large sums are at stake, there is a fear documents might be destroyed etc. (see CH223400); or
  • an investigation into a tax avoidance scheme would benefit from the early use of formal powers.

The information or document covered by a FA 2008, Sch 36, para 1 notice must be reasonably required by the officer for the purpose of checking the taxpayer’s tax position. ‘Tax position’ is an extremely wide term and relates to most foreign taxes as well as any UK tax. It includes past, present and future liabilities and is only subject to the application of the time limits for HMRC assessing the tax.

There is also a right of appeal (and HMRC internal review) against the taxpayer notice, unless the notice:

  • reflects information or documentation forming part of the taxpayer’s statutory records (these are what the taxpayer is required to keep for tax purposes under the Taxes and VAT Acts); or
  • has been approved by the First-tier Tribunal.

HMRC’s Compliance Handbook at CH212100 gives details of what ranks as a statutory record (which must be delivered to HMRC upon request) and a supplementary record which can be requested only if they are reasonably required by HMRC. A notice requiring the delivery of a supplementary record can be appealed against.

CH212100 et seq also sets out the general requirements relating to record keeping, as required by specific statute (for example as it relates to VAT) and the general requirement that records must be kept to enable any person
to make and deliver a correct and complete return.

Similar powers are used to issue notices to third parties but only after either the taxpayer agrees or approval is obtained from the First- tier Tribunal. CH23620 advises the HMRC officer to try to obtain details from the person whose tax position is being checked before approaching any third party.

HMRC’S conduct of enquiries

HMRC’s stated view is that it operates a system of ‘openness and early dialogue’ across many areas of compliance checking.

HMRC’s approach to enquiry work can be seen in a series of compliance factsheets which can be found here HMRC Leaflets, Factsheets and Booklets.

Non-business information and documents

Access to private bank account statements and the like can be a major source of friction between taxpayers and HMRC. Clarity on what does and what does not comprise a private record can be crucial. EM1561 sets out the documents and information that HMRC considers may be needed to check the accuracy of the returns of a business taxpayer. In broad terms these are:

Documents on which the return is based:

  • business accounts (including detailed analyses, eg drawings or director’s loans accounts) and computations;
  • items needed to prepare the accounts or returns;
  • reconciliations between PAYE and subcontractor records and the accounts;
  • details on particular technical points being queried; and
  • other documents.

As far as these ‘other documents’ relating to business taxpayers are concerned, HMRC state that they adopt the following approach:

  • in principle private details can be reasonably required using FA 2008, Sch 36 powers, but the HMRC officer needs to consider whether it is appropriate to use these powers at the stage reached in each particular case;
  • private bank, building society or credit card details should not be requested as a matter of course;
  • if the records on which the return was based include private records, these may be requested;
  • if means are identified as a risk or accounts are not based on a complete and effective record
    system, HMRC can request private records;
  • the basis of any request should be explained and this should be specific.

Advice on information requests for non-business taxpayers is at EM1570.

Where HMRC wishes to examine private documents it should first consider if it can verify information using third party information already held (eg from banks or building societies). In addition HMRC tells its inspectors “you should only ask to see private bank statements if you can demonstrate their relevance to the return and that you reasonably require them for the purpose of checking its accuracy”.

CH207310 refers to proportionality as well as reasonableness in that an HMRC inspector “must ensure that the administrative burden [he] place[s] on the person is proportionate to the risk”. This is not only an issue of time and cost but also of intrusion into the taxpayer’s private life. To avoid any issues under the Human Rights Act 1998, Sch 1, Article 8, the HMRC officer is advised that to assess the issue proportionally the following must be considered:

  • the nature and degree of the interference;
  • whether the interference is reasonable in the circumstances; and
  • whether the information can be obtained in a less intrusive manner.

The greater the interference the more justification is needed. HMRC suggest that discussing the reasons before asking for information will help the taxpayer understand the need for particular information or documents.

A former version of the HMRC Enquiry Manual included a number of useful examples of situations where such requests would appear to be reasonable. These included situations where HMRC considered:

  • undeclared income or gains had been credited to the private account;
  • there were doubts or questions about means or capital growth;
  • the tax return was based to a degree on the private account; where taxable receipts or expenditure were not vouched or were estimated; and
  • where payments to the business from an account are treated as non- taxable (say capital introduced) and were not verified.

There should generally be little argument if the HMRC officer is requesting statutory records or other records used in drawing up the accounts and/or return. More contentious will be cases where there is a dispute around whether the particular information is reasonably required to check the return.

Business models

There may be other non-financial records relating to the business where it is less obvious that the information being requested is relevant to a check of the return. When investigating business returns, particularly in ‘cash trades’, officers may request information they believe will help them validate the declared turnover, at least in broad terms. So the hairdresser may be asked for an appointment diary or the pub for its menu and price lists for the relevant periods. The HMRC officer will be looking to use such information to help create a business model to estimate turnover.

Such models can be simplistic and over-reliant on broad estimates. Considerable time, money and effort can be spent on these exercises with minimal useful output. Objecting to requests for information relating to such models should focus on establishing with the officer what he wants to check and why. The stronger the books and records the easier it will be to get evidence to conclude whether the request is reasonable, and whether HMRC’s perception of risk is valid. The taxpayer will invariably be on the back foot if the books and records are demonstrably weak.

Private finances

Another common method of testing risks and recalculating profits is a review of private finances. See EM3550 for details of the various approaches adopted by HMRC. The degree of detail requested may vary, but an analysis of private bank statements will be at the heart of any significant review. It is worth repeating the EM1561 advice to HMRC officers at this point: “the basis of your request should be explained and this should be specific”.

If the officer has followed this guideline then all well and good. Usually the information provided by HMRC will be fairly general but it will hopefully allow the taxpayer or his adviser to decide whether the request is reasonable.

It may be helpful to discuss whether there is a better way forward to deal with any HMRC request. For example:

  • at least in the first instance, would a review of a sample period (rather than a full tax year) minimise costs?
  • can any specific issues raised be addressed? For example, if there is a question of how a new house and other assets were financed, can it be demonstrated that there were loans, gifts, etc?

If the HMRC officer has not provided any substantive reasons for the request then a discussion needs to take place.

You can only sensibly decide on the reasonableness of the request if you understand on what basis the request has been made.

In conducting a detailed private side review, the HMRC officer may well ask for additional personal records in addition to bank statements, for example:

  • credit, debit and store card statements;
  • paying in slips, cheque counterfoils, specific paid cheques;
  • evidence of the purchase of major assets, eg completion statements or vehicle invoices; evidence of how the assets were financed, eg mortgage or loan agreements.

HMRC’s statutory power to obtain information and documents, etc (in FA 2008, Sch 36) is subject to certain restrictions (Sch 36, Pt 4). For example, Sch 36, para 19(2) provides that an information notice does not require a person to provide or produce personal records.

‘Personal records’ are defined in the Police and Criminal Evidence Act 1984, s 12 as: “documentary and other records concerning an individual… who can be identified from them relating:

  1. to his physical or mental health;
  2. to spiritual counselling or assistance given or to be given to him; or
  3. to counselling or assistance to be given to him for the purposes of his personal welfare by any voluntary organisation.”

However, an HMRC information notice may require a person to provide documents or copies that are personal records, omitting any ‘personal information’ (ie information whose inclusion makes the original document a personal record), and to provide any information contained in the records that is not personal information (Sch 36, para 19(3)).

In practice, the above restriction in HMRC’s information powers is therefore limited. For example, in Smith v Revenue and Customs Comrs [2015] UKFTT 200 (TC), the First-tier Tribunal held that, on the basis that the taxpayer’s private bank and credit card statements included business and personal transactions, HMRC’s notice requesting such information should be varied in accordance with Sch 36, para 19(3), such that the taxpayer was required to provide the bank and credit card statements, but omitting any personal information.

The purpose of the detailed reviews is set out at EM3560 and EM3593 in relation to:

  • identifying spending patterns;
  • checking incoming and outgoing transfers;
  • reconciling credits with drawings, director’s loan account, etc;
  • indications of other accounts and use of cash;
  • checking claimed non-business sources of funds;
  • seeing how regular payments and large payments were met; and
  • taking a view on the taxpayer’s lifestyle.

The HMRC officer may seek information from the taxpayer’s spouse or partner to complete the review of private finances. CH207325 advises that in smaller cases the officer can ask the taxpayer to obtain from the spouse a statement of gifts, loans or whatever. If the private side is a ‘material consideration’ then the officer may need to consider the spouse’s:

  • income and gifts;
  • assets; and
  • spending habits.

Such requests should be made direct to the spouse and in the absence of the required information a third party information notice may be issued.

Progressing the enquiry

At the early stages of an enquiry HMRC will have identified a number of risks but may well have little if any damning information. The worse the state of the records the more likely it will be for HMRC to push hard for details that might help in establishing a view of those risks. As the investigation unfolds, HMRC will develop a clearer picture of potential problems and this will influence requests for further and better particulars in relation to the business and/or the private side. In simple terms, HMRC will be looking to put itself in a better position to argue its case before the tax tribunal if matters were to progress through such action.

A common request is for certain working papers of the accountant to be provided. These are ‘link papers’ – that is, those explaining an entry in the records and the corresponding entry in the return. HMRC’s view is that where necessary these can be obtained formally through the taxpayer or the accountant (EM10023 and EM10150). Provision of the trial balance may save time and trouble in answering basic questions.

HMRC’s position on information requests for directors of close companies is set out in EM8211. If the enquiry is into the company and the private finances of the director are a ‘particular concern’:

  • the company should be asked (voluntarily) to provide private bank statements of the director;
  • if these are not produced and there are clear risks present on the director’s return, an enquiry into that return may be opened and an information notice issued to the director;
  • if this is not appropriate or not possible because of expired time limits, a third party information notice may be issued to the director.

Relevant cases

  • Singh v Revenue and Customs Comrs [2014] UKFTT 299 (TC) – dealing with bank statements delivered in response to an information notice which had certain names redacted.
  • Spring Capital Ltd v Revenue and Customs Comrs [2015] UKFTT 8 (TC) – where the tribunal held that HMRC was entitled to check a company’s tax return without having ‘grounds for suspicion’. There was nothing in Sch 36, para 1 that required HMRC to suspect that the return was incorrect before issuing an information notice.
  • Betts v Revenue and Customs Comrs [2013] UKFTT 430 (TC) – where HMRC failed to convince the tribunal that it had a real and genuine belief (and to provide evidence) of the fact that the amount that ought to have been assessed may not have been assessed.

Ian Roberts BA, Partner, the TACS Partnership. Acknowledgement: This text includes commentary originally produced by Chris Chadburn BSc. This is an extract from ‘HMRC Investigations Handbook 2018/19’, published by Bloomsbury Professional

By HMRC Enquiries Investigations & Powers Magazine

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