HMRC Enquiries: Are Private Bank Statements Really Private?

By | 18 June 2016

Dealing with tax return enquiries by HM Revenue and Customs (HMRC) can be a time-consuming exercise. Part of that time can sometimes be spent arguing with HMRC about the information they are required to see in order to check the accuracy of the tax return.

For example, self-employed taxpayers (or those with a property rental business) might find themselves being asked by HMRC to provide copies of private bank and credit card statements if the relevant accounts have been used for both business and private purposes. However, is HMRC entitled to see information of such a personal nature, and if so, to what extent?

Personal records

The general rule is broadly that HMRC may send the taxpayer a written notice (an ‘information notice’) requiring the taxpayer to provide information or produce a document if it is ‘reasonably required’ to check the taxpayer’s tax position (FA 2008, Sch 36, para 1(1)).

However, HMRC’s information powers are subject to certain specific restrictions (in FA 2008, Sch 36, Pt 4). One such restriction is that the taxpayer is not required to provide or produce ‘personal records’ (as defined in the Police and Criminal Evidence Act (PACE) 1984, s 12). One might assume that personal records would automatically include private bank and credit card statements. Unfortunately, that is not the case.

‘Personal records’ are narrowly defined in PACE 1984, s 12, broadly as records relating “(a) to his physical or mental health; (b) to spiritual counselling or assistance given or to be given to him; or (c) to counselling or assistance to be given to him for the purposes of his personal welfare by any voluntary organisation…”.

Even if a bank or credit card statement satisfies the definition of a personal record, HMRC may still issue an information notice requiring the taxpayer to produce the personal record, but omitting any personal information of the above nature (FA 2008, Sch 36, para 19(3)).

‘Mixed use’ accounts

In Smith v Revenue & Customs [2015] UKFTT 200 (TC), the taxpayer received rental income from various properties. HMRC issued an information notice during an enquiry into the taxpayer’s tax return for 2011/12, requesting (among other things) sight of bank statements for any account into which business monies were lodged or business expenditure paid, and credit card statements for any account from which business expenditure was paid. Unfortunately, the taxpayer did not operate separate business and private bank and credit card accounts. He appealed against the information notice.

The tribunal noted that an HMRC information notice does not allow access to ‘personal records’ within PACE 1984, s 12. However, the tribunal also noted that an information notice may require a person to provide documents that are personal records, omitting any personal information. The tribunal held that HMRC’s information notice should be varied (in accordance with FA 2008, Sch 36, para 19(3)), such that the appellant was required to provide the bank and credit card statements, but omitting any personal information.

Practical tip

Whilst the tribunal’s decision in Smith does not create a binding precedent, it will probably be seen as a worrying development by some taxpayers and advisers. It indicates that if a bank or credit card statement sheet contains no ‘personal information’, it is not a personal record, and that HMRC can request private bank and credit card statements used for mixed (personal and business) purposes, with the omission of the very limited amount of personal information as mentioned above.

It should be remembered that the information requested by HMRC must still be ‘reasonably required’ to check the person’s tax position. However, if a private bank or credit card account was being used for both business and private purposes, it would be difficult to argue that the statements were not reasonably required in the context of an enquiry into business profits. Furthermore, there is no right of appeal against an information notice to provide information or produce documents forming part of the taxpayer’s statutory records (FA 2008, Sch 36, para 29(2)). To avoid such problems, taxpayers should therefore maintain entirely separate business and private bank and credit card accounts. 

The above article was first published by Tax Insider (October 2015) (www.taxinsider.co.uk).