Keep Your Records!

We had a question at Tax Insider last month, asking how long the law requires you to keep your records for tax purposes.   The short answer, which we gave in the Q & A section, is:  

• Business Records – until the fifth anniversary of the 31 January filing date for the return – so your records for your 2005/06 return must be kept until 31 January 2012
• Non-business records – until the first anniversary of the filing date – so for 2005/06 records, until 31 January 2008

  That’s what the law says – there are penalties for not complying with these periods – but the question made me think about the number of people I have seen get into trouble through not keeping things they probably did not consider were “records” for tax purposes.   Any business needs proper records of its income and expenses, of course, and these must be kept properly, and kept up to date, but this article is not about those records. I want to look at other “records” that a tax inspector may ask to see if you are the subject of an investigation.   Bank Statements Not just the business bank account – I mean your private current and savings accounts, including building society passbooks. I also include credit card statements.   Everyone has non-taxable items that they pay into their accounts – looking at mine, there is a cheque from a family member paying me back for something I bought for her while I was in town, a cheque from a friend repaying some money I had lent him, and another cheque from some friends for their share of a joint holiday we arranged.   When an inspector is investigating you, he is likely to go through your bank statements with a magnifying glass, and ask you to explain every deposit into the account. If you cannot do so, he will demand that the deposits be treated as undeclared taxable income, and the onus will be on you to prove him wrong.   So keep the letter that came with the cheque from your friend, keep the receipt from the joint holiday – and make a note in your paying in book or your bank statement saying where the deposit came from.   Gambling wins As a tax inspector, I was under orders never to accept that any cash unaccounted for was the product of a gambling win, even if (for example) the taxpayer could quote the name of the horse and the race involved. The official view is that even if you won money on that occasion, you must have lost more on other occasions (and in my case, sadly, they would be right!).   If you have any significant gambling wins, make sure you keep as much evidence as possible – a copy of the lottery payout slip, a photocopy of the cheque from the Pools, a copy of the betting slip, or whatever. You may still end up having to justify the money before the General Commissioners (an independent tribunal who resolve disputes between you and the inspector), but at least you will have some evidence to back you up.   Gifts, legacies, sales of private items like cars, jewellery, etc. Exactly the same policy applies to all these, so keep a record – a photocopy of the cheque, correspondence from the lawyers, or the saleroom receipt for the painting you sold.   The most interesting example of “proof” of a cash gift I was ever shown when I was an inspector was a Polaroid photograph of a lady sprawled naked on a bed covered (the bed and the lady) in banknotes – the Official Secrets Act prevents me from telling you more, but she ended up paying a lot of tax!   Remember also that if the source of the money was a loan or a gift from a friend or a family member, the inspector will look at their tax records to confirm they had enough income or assets to make the loan or gift.   In all of these cases, inspectors are UNDER ORDERS to get approval from their superiors before they accept the explanation given. Their official instructions tell them this about betting wins, gifts, and so on: “Experience has shown that the majority of such claims are false and are withdrawn, or at least not persisted in, when seriously challenged. Commissioners usually reject such claims if pursued to a hearing. Except where there is clear and irrefutable evidence to support the taxpayer's contentions, any claim of this nature should be firmly resisted, if necessary, to the point of a personal hearing before the Commissioners.”  (See paragraph EM2053 of the Enquiry Manual)   So never mind the legal requirements for keeping records – for your own defence, keep all records!