Q. When H M Revenue & Customs came to review my business records as part of a cross tax review they asked for sight of my personal financial records in addition to the business records. Do I have to provide these details? What are my rights in this position?

A. An area that causes many accountants concern when dealing with HMRC enquiries is the request by the Inspector to see the taxpayer’s personal financial records. In response to your question I will look more closely at this issue of personal financial records and clarify some of the changes introduced by Schedule 36 Finance Act 2008.

Traditionally, in many cases HMRC requesting personal records during the course of an enquiry is seen by professional advisors as nothing more than a fishing expedition causing additional work and cost without any significant proof that this information is required.

The new information powers in Schedule 36 should prevent fishing expeditions occurring as HMRC is only entitled to seek information or documents that are “reasonably required” for the purposes of checking the taxpayers tax position. Of course as with any legislation, especially tax legislation, attempting to define or prescribe in advance “reasonably required” remains a challenge. However some of the examples below would clearly be unreasonable requests and should be strongly challenged.

• Requesting a detailed analysis of private expenditure when it is obvious that the available means are more than adequate to sustain the individuals lifestyle and are substantially greater than average income.

• Asking for private bank accounts or credit card statements when means are adequate and there is no suggestion that there is any business transactions conducted through these accounts.

• Asking for diaries when there is no suggestion of any deficiency in the sales record (even appointment diaries are not a record of sales but rather an intention to provide a service that may not necessarily have occurred).

Of course it is important to stress that where at all possible personal accounts should never be used for business purposes thus strengthening the position to challenge any request form HMRC to review personal records. Be prepared to make challenges and be robust in protecting your position.

During the course of any enquiry or record inspection it is important to also remember that whilst HMRC may have evidence to support a “reasonable request” to see personal records the identified risk must also be relevant and proportionate. Where requesting information and documents would be unduly onerous in terms of time, effort and cost and disproportionately greater than any benefit to be obtained by HMRC then consider challenging the request on the grounds of proportionality.

A refusal to supply personal records especially bank and/or credit card statements would enable HMRC to invoke its power to obtain information from third parties directly under paragraph 2 of Schedule 36.

It is important to remember though that the authorising officer will be of a senior grade and accountable for his decisions. HMRC internal guidance clearly states that authorisation should only occur if the officer carrying out the visit actually needs to authorise the power having exhausted all other means of answering the risk question. These include:

• Communicated the question usually in writing, by phone or at a meeting and been refused or encountered significant delays.
• Have a clear picture of risk.
• Considering the cost burden on the taxpayer and have evidence to show that the question is reasonable and necessary to check the true position (Therefore requesting four years personal bank statements without evidence is out of the question!).
• Confirms that the intervention plan supports the question/request.

This need to refer to a senior officer for authorisation and the review of the case should ensure that requests for personal records only occur when a clear risk has been identified by the officer carrying out the visit.

If HMRC do proceed to invoke the third party powers then a right of appeal does exist in paragraph 30 Schedule 36 FA2008.

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