This case demonstrates just how important it is not to give HMRC any reason to start a compliance check
As part of a compliance check into the tax returns of two company directors, the information notices issued by HMRC included a request to see private bank statements as well as a description of the source of funds for any deposits made.
For 2015/16, the two directors had submitted self-assessment tax returns showing income from employment and dividends but had omitted trivial amounts of interest. This was a year before the introduction of the personal savings allowance, so the omitted interest might well have affected the directors’ tax liabilities. The directors appealed against HMRC’s request to see private bank statements.
HMRC’s internal guidance to inspectors states that, when opening a compliance check “you should only ask to see private bank statements at this stage if you can demonstrate their relevance to the return and that you reasonably require them for the purpose of checking its accuracy.”
There is no right of appeal, however, against a request for information that forms part of a taxpayer’s statutory records. The private bank statements would only have qualified as statutory records if there were further omissions in the tax returns. HMRC argued that it could not know this in advance, but the judge hearing the appeal at the First-Tier Tribunal was not convinced. The decision therefore rested on whether the bank statements were reasonably required.
HMRC was able to show third-party evidence of a disparity between the directors’ declared income and their personal expenditure, including the level of mortgage payments and capital injections made into the directors’ company. The verdict, not surprisingly, was that the private bank statements were reasonably required and the appeals dismissed.
This case demonstrates just how important it is not to give HMRC any reason to start a compliance check. All sources of income should be declared, even if trivial. The availability of the personal savings allowance, the dividend allowance, and the £1,000 trading and property allowances will mean that there might not be any tax liability in any case.
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