Any taxpayer who submits a tax return can be selected for an HM Revenue and Customs (HMRC) enquiry at random. Those taxpayers unfortunate enough to be selected may find HMRC’s tax return enquiries rather obtrusive.
Is HMRC entitled to see a self-employed taxpayer’s private records, and if so, to what extent?
It’s the law
HMRC has extensive information and inspection powers. The taxpayer has a general right of appeal against HMRC’s information notices, such as if the information requested is not considered to be ‘reasonably required’ (see below). However, there is no right of appeal if the information or document forms part of the taxpayer’s statutory records.
Information or a document forms part of the taxpayer’s ‘statutory records’ broadly if the tax legislation requires the taxpayer to keep it (FA 2008, Sch 36, para 62). For the self-employed taxpayer, the records to be kept and preserved include the following (TMA 1970, s 12B(3)):
- records of all receipts and expenditure ‘and the matters in respect of which the receipts and expenditure take place’; and
- records of all sales and purchases of goods (in the course of a trade involving dealing in goods).
It is important that business transactions are not made through private accounts. For example, in Beckwith v Revenue and Customs  UKFTT 181 (TC), over 90 business transactions went through the taxpayer’s personal account during the tax year under enquiry. The personal account was therefore held to be a ‘business record’ and formed part of the taxpayer’s statutory records. Accordingly, the taxpayer had no right of appeal against HMRC’s information notice to the extent that it asked for his personal bank statements.
Let’s be reasonable
Even if private records do not form part of the taxpayer’s statutory records, there is still a requirement to provide information or produce a document that is ‘reasonably required’ to check the taxpayer’s tax position.
Whether private records are ‘reasonably required’ has caused many disagreements between taxpayers and HMRC. Keeping business and private transactions entirely separate should help to avoid such disagreements arising.
In Smith v Revenue & Customs  UKFTT 200 (TC), the taxpayer received rental income from various properties, but unfortunately did not operate separate business and private bank and credit card accounts. The First-tier Tribunal (FTT) held that HMRC’s information notice should be varied, such that the appellant was required to provide the bank and credit card statements but omitting any personal information.
The ‘private side’
In the context of an HMRC enquiry involving a taxpayer’s business accounts, if HMRC establishes that the business records contain inaccuracies, this is often used as justification to extend the scope of the enquiry into the ‘private side’. HMRC adds in it guidance: ‘No full private side examination can be undertaken without access to private bank account statements.’ However, the guidance instructs HMRC officers: ‘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.’
Even if business transactions have been fully recorded and private accounts have not been used, HMRC sometimes ask to see private account statements if drawings from the business have been lodged in them. However, it should be noted that drawings do not form part of the accounts required for self-assessment purposes.
The message for taxpayers is clear: avoid using private accounts for business transactions.
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