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HMRC can examine taxpayers' personal bank account statements

Monday, 3 December, 2018

HMRC can demand sight of taxpayers' private bank statements if it believes their declared business income does not support their private cash outgoings, the First-tier Tax Tribunal has found.

The two taxpayers, Carol Holmes and Andrew Knight, are directors of their jointly owned business. They had submitted self-assessment forms declaring identical earnings from employment, dividends and interest for 2015-2016. But HMRC suspected that they had not declared all their savings interest income, and opened enquiries into both returns on identical terms in 2017. It demanded full disclosure of all their bank accounts.

The two complied as far as providing certificates of bank accounts and a joint mortgage account, but they objected to supplying bank statements for accounts used for their personal finances, including their interest from personal savings. HMRC insisted, claiming that the statements form part of the taxpayers' statutory records, and as such there is no right of appeal against the information notices. Holmes and Knight appealed to the First-tier Tax Tribunal, arguing that their private records were not statutory records and were not reasonably required for checking their tax positions.

Their position was that their tax returns were substantially correct, apart from the omission of certain trivial amounts of interest. They said their sole incomes for tax purposes arose from employment earnings, dividends and interest, so that the only records they were required by law to keep were the end-of-year P60s, their dividend counterfoils and certificates of interest. They argued that it was only if the tax returns were incorrect and failed to show an additional source of income that bank statements might be necessary for the purpose of delivering a correct return. They cited the case of Spring Capital v HMRC (2015 UKFTT 0008 TC), in which the appellant maintained that the information notice was invalid because the documents and information were not reasonably required and the notice was just a 'fishing expedition'.

They also claimed that HMRC had jumped to conclusions about the disparity between their declared income and expenditure. The discrepancy was explained by their use of historic income and family money to support their expenditure, said the couple.

HMRC's response was that only the taxpayers could know what their sources of income were, that the burden of proof lay with them, and so the bank statements demanded were indeed part of their statutory records. In case the tribunal disagreed with that argument, HMRC had a fall-back position in that the bank statements were reasonably required for the purpose of checking Holmes and Knight's tax positions.

In its ruling, the tribunal noted that HMRC does not need to have any suspicions in relation to that return before checking it, though it must use a test of reasonableness in relation to the documents and information that taxpayers can be required to provide.

Tribunal judge Jonathan Cannan decided the evident disparity between the couple's declared income and expenditure gave HMRC a legitimate reason to make further enquiries; that it was not obliged to question the taxpayers first; and that its demand for bank statements was proportionate and reasonable. He duly upheld HMRC's information notice (Holmes and Knight v HMRC, 2018 TC6824).

Sources