INVESTIGATIONS - 02.03.2006

Sorry, it’s strictly business Mr Taxman

Private requests

Fishing expedition. An ongoing battle between the Taxman and taxpayers concerns requests to access purely personal financial information during enquiries into a business. The main issue is requests by the Taxman for, say, private bank statements in the early stages of an enquiry. And he doesn’t give long to comply either.

Deadlines. With an informal request for information, the enquiry legislation does not specify a time limit for compliance. However, it’s common for the Taxman to set a deadline for submission of the information requested. In 90% of cases either a 30-day limit from the date of receipt of the request, or 35 days from the date of the notice of enquiry, is set. Failure to comply voluntarily is often taken by the Taxman as lack of co-operation, which increases penalty charges if the tax return is later found to be flawed due to negligence.

Deaf ears. Anecdotal evidence suggests that inspectors are itching to issue formal notices to produce documents on expiry of their informal request. This, despite attempts to explain to the Taxman the difficulties in gathering the information within the suggested time frame. Following a recent case however, we think there is something you can do about this.

Recent case

Mr Taylor had encountered some difficulty in providing all the information required by an inspector; because he had not been able to extract it all from the computer on which he maintained his records. Consequently, he had to appeal against a formal notice requiring documents relating to personal expenditure (in addition to business records) issued just after the informal request period had expired. This appeal eventually went before the Special Commissioners (SpC) who declared that “the inspector’s request was intrusive and the taxpayer should not be required to divulge details of personal expenditure if that could be avoided.” The Taxman would have to come back to the SpC if he still wanted to look at private information after reviewing the business records (Taylor v Bratherton SpC 448).

How should you respond?

Tip 1. If you object to the Taxman looking at purely personal information, insist that you’re treated in the same way as the taxpayer in the Taylor case, i.e. business records first Mr Taxman.

Tip 2. Further, as in the Taylor case, use the “information trapped inside computer” or “we’ve changed our computer” as reasons to only supply part of the business information requested by the deadline set by the Taxman.

Warning. Of course denying access to personal documents because they actually contain evidence of diverted profits is not a sensible path to follow.

Specifically directors. Mr Taylor was self-employed and the Taxman was enquiring into his personal tax returns. However, our advice applies equally to enquiries into a company where the Taxman asks for private information from the directors. This is definitely outside the boundary of an enquiry into a company’s tax return. If he has a suspicion that income has not been taxed, he has to open a separate enquiry into the director’s own personal tax returns. Don’t allow the Taxman to go on a fishing expedition through your director’s private records.