Mark McLaughlin warns that mixing business and private transactions through the same bank account can have some unfortunate consequences.
It may often be tempting for self-employed individuals to use their private bank accounts for business transactions, perhaps for reasons of convenience, or possibly to reduce bank charges.
However, even if the business owner meticulously identifies business transactions, difficulties invariably arise when using private bank accounts for business.
The dreaded ‘brown envelope’
For example, if HM Revenue and Customs (HMRC) opens an enquiry into the self-employed individual’s tax return, this will often be followed by a request for access to the business records, including statements for all bank and credit card accounts through which business transactions were made.
The question arises: is the individual obliged to hand over private account statements (which could extend the scope of HMRC’s enquiries)?
They can’t do that…can they?
HMRC has extensive information and inspection powers, subject to certain (albeit somewhat limited) restrictions (FA 2008, Sch 36). 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’.
However, there is no right of appeal if the information or document forms part of the taxpayer’s ‘statutory records’ (i.e., broadly, records that the law requires taxpayers to keep). For example, a self-employed taxpayer is required to keep and preserve (among other things) records of the following (TMA 1970, s 12B(3)):
-
All receipts and expenditure ‘and the matters in respect of which the receipts and expenditure take place’; and
-
All sales and purchases of goods (in the course of a trade involving dealing in goods).
In Beckwith v Revenue and Customs [2012] 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, so the taxpayer had no right of appeal against HMRC’s information notice request for his personal bank statements.
Reasonably required?
Even if the business owner’s private statements do not constitute 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.
However, one of the statutory restrictions on HMRC’s information powers is that the taxpayer is not required to provide or produce ‘personal records’, which are narrowly defined (in PACE 1984, s 12); but even if a private bank or credit card statement constitutes a ‘personal record’, HMRC may still issue an information notice requiring the taxpayer to produce the personal record, but omitting any personal information.
For example, in Smith v Revenue and Customs [2015] UKFTT 200 (TC), the taxpayer received property rental income, but did not operate separate business and private accounts. On appeal against an HMRC information notice requesting private bank and credit card statements, the First-tier Tribunal held that the taxpayer must provide private bank and credit card statements, but could redact any personal information.
HMRC’s Enquiry Manual states (at EM3560): ‘You should not routinely call for [private bank account statements] in the opening letter of an enquiry. Exceptional circumstances might be a voluntary disclosure of undisclosed business receipts into a private account.’
Practical tip
Whether private records are ‘reasonably required’ has caused many disagreements between taxpayers and HMRC. Keeping business and private transactions in entirely separate accounts should help to prevent such disputes.
