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Not Reasonably Relevant

16 January 2002 / Anthony Bassett
Issue: 3840 / Categories:

ANTHONY BASSETT FCA describes a successful appeal to the General Commissioners regarding the production of private bank statements.

ANTHONY BASSETT FCA describes a successful appeal to the General Commissioners regarding the production of private bank statements.

MY CLIENT RECEIVED a section 9(A) letter initiating an Inland Revenue Enquiry including a request for 'private bank and building society accounts whether operated jointly or individually'. The 1999 tax return covered a 23-month period with two self employment pages each with a three line set of accounts; one of these showed expenses with no income. The books and records were supplied without the private bank records and no errors or omissions were found.

After receiving repeated refusals for the supply of the private records, the Inspector issued a section 19A notice for their supply for the entire trading period, against which I appealed within the statutory 30-day period.

As our clients generally have insurance to cover our fees during investigations, I had advised the Revenue that we would be supported. In the event, saying that we had no better than a 50 per cent chance of winning, our insurers refused to take the case but did offer to meet our reasonable costs if we won! I believed a point of principle was at stake and also that, if I gave in on this occasion where we had meticulous records, we would never be able to resist the request again. Whilst preparing my case, I posted a question on 'Any Answers' on the internet site Accountingweb and Nicki Ross-Martin (see 'Reasonably Relevant', Taxation, 11 January 2001 at pages 341 to 342) provided much helpful assistance. She reviewed my notes to date and made many recommendations; on her advice, I applied for a section 28A(6), Taxes Management Act 1970 closure notice.


I prepared a bundle of papers covering: statutory and Inland Revenue guidance (Enquiry Handbook, Codes of Practice, Taxes Management Act 1970, etc.); correspondence pre and post the section 19A notice; and the Special Commissioners' case report of Accountant v HM Inspector of Taxes (SpC 258). Two-and-a-half weeks before the hearing, the Revenue asked if I would agree to an observer attending. I took the opportunity to say that I was contemplating not bringing the client. He said he would expect to call my client as a witness – with me calling the Inspector as mine! A week before the hearing, I wrote to the Inspector, copy to the Clerk, advising that I would not be bringing my client.

Five days before the hearing, the Revenue telephoned to advise me of his documentation (broadly very similar to mine) and said that he – not the investigating Inspector – had found one business credit card statement not paid from the business account.

The hearing

As appellant, I introduced my team and asked the Inspector to reciprocate. I objected to the presence of the investigation Inspector during my presentation and, after some confusion and discussion, this was agreed and the Inspector retired.

The taxpayer's case

I quoted section 19A(2)(a) and (b) emphasising heavily the word 'reasonably' in each case and referred to the Inland Revenue Code of Practice 11: 'we will only ask for information which is relevant to the entries on your return', and paragraph EH398 of the Enquiry Handbook: 'section 19A does not specifically give access to private bank accounts'. I emphasised that, assuming the Commissioners found for me, I was also applying for a closure notice.

I introduced the broad concerns of the Institute of Chartered Accountants in England and Wales that a straightforward case could get out of hand and that an opening request for private records is draconian – and that the Inland Revenue manuals echo these points. I stated the Institute's views that a section 19A order in such circumstances could lead to a fishing expedition, that it is costly and stressful for all taxpayers, and bringing in unnecessary and irrelevant information prolongs the process and increases costs, and there are more effective methods of proving income (capital statements, cash flow exercises).

I stated the Inland Revenue view as wanting a 'proper picture' without a definition which could therefore require a full investigation of all the family over an extended period; that the Inland Revenue assumed guilt if a record was not provided and that it did not see that this increased costs (but who pays them and answers the questions?). I am particularly indebted to Nicki for these points.

I introduced the tribunal case (Accountant v HM Inspector of Taxes) and stated that I did not consider this was relevant since that appellant had been an accountant with no personal bank accounts (!!), that Special Commissioners' decisions are not legal precedents and that the Special Commissioner had emphasised that his decision was based on the 'particular facts of that case'.

I described my client as a retired consultant who had been employed in the Civil Service, Local Authority and National Health Service and had ceased trading in 1999 with a pension of £12,000 net, a working wife, no mortgage and largely self-sufficient children. There was no evidence of an expensive lifestyle, hobbies, etc. and no proof of living beyond the means declared.

I outlined the investigation history, that it had opened with the specific request for private statements and had run for 16 months with no errors, omissions or faults found. Royalties had been queried and explained. There had been full cooperation apart from the one matter under appeal.

I emphasised that the client had fully complied with the record keeping requirements of section 12B(1) and (3), Taxes Management Act 1970. I introduced paragraph EH319 of the Enquiry Handbook entitled 'private bank and building society statements' and the fact that this advised the Inspector not to call for them until the necessity had been justified and, if they were called, full justification should be given. I pointed out that no justification had been supplied at all when the request was made. I referred to Code of Practice 11 again – 'if we decide we need other information, we will explain our request fully' – and emphasised the lack of full explanations.

Revenue justification

The Inspector had sent a letter to the client with the section 19A notice including four reasons for requiring the statements:


(i) 'Cheques drawn from the business account were paid into a private account'. How, if not by cheque, should drawings be made? I emphasised that drawings are not part of the accounts and have nothing to do with the tax return.


(ii) 'Certain business cash expenditure had been funded from private funds'. The forty cash items came to less than 2 per cent of the expenditure and only seven were greater than £5. I argued that it was not possible to match a 30p or even £3.50 cash parking ticket to a specific cash withdrawal from a bank, and that my client had a net pension of £12,000.


(iii) 'As there is no reliance upon the business to finance personal spending directly, I require sight of the private accounts to check whether there are adequate and regular funds withdrawn from these accounts, to finance personal spending'. I again emphasised that the pension was the means by which living expenses were supported, that the Inspector's duty was to ensure the accuracy of the return, that no attempt had been made to assess my client's living requirements, that the Inspector was 'fishing' to save face, and that the tax return could not be disputed on this point – but the Inspector's judgment could.


(iv) 'Additionally, I have been unable to reconcile the payment of royalties … with payments lodged within the business accounts'. I pointed out that this had been explained when the original documents had been submitted – the £34 concerned had been split between two returns – that royalties were not business income anyway and should not – and were not – put into the business account.

I referred to the missing business credit card payment and, emphasising that this was only one from regular such payments, produced the relevant private statement. Together with three that had been supplied during the investigation in support of specific transactions, the Inspector had now seen four statements and there was not a single entry that could be queried.

Procedural confusion

I expected the Revenue to introduce the investigating Inspector as a witness but was confused – as was the Clerk – when the Revenue maintained that the Inspector was my witness. Without firm guidance – and I still fail to see how the Revenue can be my witness with the client being the Revenue's witness without having a 'hostile witness' position – I agreed to examine the Inspector.

I introduced paragraph EH64 of the Enquiry Handbook ('neutral approach') and paragraph EH303 ('do not express grounds for concern at this stage') and asked if the Inspector thought his approach was neutral (he thought it was!) and his grounds for his opening request. He said he had carried out a risk analysis and that, as there was no income in part of the period, the expenditure must have been met privately. I asked if he reasonably needed them as stated in paragraph EH319 'private bank and building society statements'. He repeated his 'risk analysis' explanation and I countered that that proved non-neutrality and that he had already reached his conclusion.

I emphasised, by referring to paragraph EH398, the fact that his own guidance required there to be reasonable grounds. I got agreement to the accuracy of the information concerning other income and asked for confirmation that no error, omission or fault had been found. He replied 'not yet'!

The Revenue response

In response, the Inspector read, very rapidly, great tracts from Accountant v HM Inspector of Taxes but failed to emphasise any point he was trying to make. We, and I am sure the Commissioners, soon lost both track and attention. He did make the point that there was no other way to prove the tax return, which I challenged by suggesting capital statements, cash flow exercises, etc.


The Inspector summed up, emphasising that the Inland Revenue Manuals were only guidance and Inspectors did not have to follow them precisely, and referred to 700,000 other opening letters that I had not produced in evidence. He also said that they were not saying something was wrong but needed to find out.

The decision

After two hours of consideration, the Chairman summed up that they had found that there had been a specific request for private statements without justification, reasonable or otherwise, and internal guidance had not been followed. He referred to the justifying letter sent to the taxpayer and said that the explanations given did not satisfy the reasonable justification required. The Commissioners set aside the notice and instructed the Revenue to issue a closure notice.

The future

As we left the hearing, the Revenue Inspector presenting the case expressed his frustration and said that this had to be sorted out. I left with the distinct view that unofficial guidance from Head Office was to acquire private bank statements in all cases and that this was necessary for its proper view.

It is my opinion that taxpayers' representatives need to be aware of this and to ensure that this jump into the personal and private affairs of taxpayers is resisted most strongly. I shall be pleased to receive others' experiences of challenges for private statements, especially if they have gone to General Commissioners.


Andrew Bassett is a partner in Bassett Herron, which has offices in Newcastle, Hexham and Prudhoe, Northumberland.


Issue: 3840 / Categories:
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