Don't Panic, Mr Taxman

'Don't tell him, Pike!', was recently voted one of the most memorable moments in British television comedy. For some time I have been contemplating a similar situation taking place within the offices of the Inland Revenue. Imagine the scene: Mr Mainwaring (a diligent, but rather blustering tax adviser) and Mr Pike (his naïve client), are in a meeting with the local Inspector, Mr Hector, as part of an enquiry under section 9A, Taxes Management Act 1970. Hector eventually alleges that the profits of Pike's scarf manufacturing business are understated and, as a result, tax-geared penalties will be sought in addition to the further taxes. Mr Mainwaring (no doubt huffing and repositioning his spectacles) immediately states that his client cannot be expected to comment any further, advises Pike to remain silent and beats a hasty retreat, leaving behind a bewildered Hector.
The above scenario appears far-fetched, and Mr Mainwaring's tactical decision would probably backfire in real life, but it could be argued that the adviser in this scenario was simply seeking to protect his client's human rights.
We are now seeing more and more instances in which the Human Rights Act is being considered by courts and tribunals throughout the United Kingdom. A recent case heard in the magistrates court in Birmingham concerned a car owner who refused to confirm if he was driving his own vehicle as it sped past a police camera. The magistrate agreed that the driver was entitled to avoid self incrimination, and so could not be prosecuted for failing to disclose if he was the driver at the time.
What then will be the impact of the Human Rights Act on tax investigations in the real world?
Introduction to the Act
The Human Rights Act incorporates the 'jurisprudence' of the European Convention on Human Rights (the convention) into the United Kingdom, and is scheduled to come into force on 2 October 2000. It will apply to all formal proceedings after that date, including any proceedings relevant to any cases predating 2 October 2000. In effect, the principles of the convention are already being taken into account by the United Kingdom courts. The Home Office has issued guidance to all Government departments, including the Revenue, making it clear that departments must operate within the requirements of the convention and that the rights afforded under the convention are enforceable in the United Kingdom courts and tribunals. The Revenue is required to operate in accordance with the convention where at all possible, including when interpreting legislation and exercising any discretion. Importantly, however, the Human Rights Act does not override primary legislation.
This could lead to some fundamental changes in the systems and practices currently used by the Revenue, particularly in the field of compliance and investigation work, and especially where litigation is in place or in prospect. The purpose of this article is not to provide answers at this early stage, but to raise the profile of the potential issues with a view to promoting open debate among the profession and the Revenue in order to obtain the answers we will all require for the clear, efficient and fair administration of the tax system. The immediate future will be a period of increasing uncertainty. It is in everybody's interest, the Revenue, the profession and taxpayers in general, to achieve clarity in this regard as soon as possible. In order to spark the debate let us look at some of the potential issues.
Civil or criminal?
A key question in any investigation case will be whether the enquiry is a civil or a criminal one. Currently the Revenue applies its own definitions. It deals with the vast majority of cases on a 'civil' basis, i.e. cases that are worked towards money settlements rather than towards prosecution (and this includes Special Compliance Office cases worked under the Hansard procedure). A very small number of cases (currently around one hundred a year) are classified by the Revenue as criminal prosecution cases. These are cases which are actively being worked with the intention of bringing criminal charges before the courts and are conducted under the terms of the Police and Criminal Evidence Act by specialist groups within Special Compliance Office.
The convention's definition of 'criminal' is significantly wider than the Revenue's, as demonstrated in the recent case Bendenoun v France (18 EHR 54). A case currently worked as criminal by the Revenue is likely to remain so on convention principles. However, if an offence can give rise to a penalty which is punitive (rather than purely compensatory) it is likely to be considered a criminal matter for convention purposes, even though the authorities may have, hitherto, treated the matter on a civil basis in practice. A number of principles are taken into account in determining whether a penalty is criminal for these purposes. One is the size of the penalty risked, but not necessarily charged. It is highly unlikely that small fixed penalties would be regarded as within the criminal ambit. The wider definition of criminal is not uniquely European; there are a number of United Kingdom decisions supporting the view that tax-geared penalties are within the criminal ambit, including Lord Advocate v AB 3 TC 617 and Attorney General v Canter 1 KB 318.
In many cases, settlements sought by the Revenue are generally made up of additional tax, interest and tax-geared penalties. It would appear that additional tax and corresponding interest is merely financial compensation for the Crown but the penalty is a punitive imposition. The report of the Keith Committee confirmed beyond doubt that tax-geared penalties were meant to be punitive and a deterrent (19.1.6). It follows that any case involving penalties is likely to be considered criminal on convention principles.
This will bring a large number of cases currently considered as civil within the convention definition of criminal. In this context the Revenue's own current definitions appear to be largely irrelevant. The result is that the additional rights and protections afforded by the convention must be respected by the tax authorities; particularly those under Article 6, the right to a fair trial and Article 8, the right to privacy.
There is significant doubt that the Revenue has the desire or the resources to work all its enquiries and investigations to criminal standards, but Inspectors must now consider the impact of the convention on their work.
Deceased estates
There is increasing evidence of the Revenue examining the tax affairs of deceased taxpayers with a view to collecting additional tax, interest and penalties for years prior to the date of death. This is an area where the convention would appear potentially to have a major impact. Under section 100A, Taxes Management Act 1970, the Revenue may impose a tax-geared penalty upon the personal representatives of the deceased. By virtue of section 102, the Board may mitigate, compound or stay those proceedings at its discretion.
Following the case of AP MP and TP v Switzerland (application 19958/92) it was held that, as a fundamental principle, criminal liability cannot survive the death of the person who committed the criminal act. Again this is not a uniquely European concept, such a view has been long established in English common law, and was clearly set out in R v General Commissioners (ex parte Dawes) 42 TC 200. It was the introduction of the specific legislation that is now section 100A that has allowed the Revenue to penalise personal representatives in this regard.
It would appear that section 100A is incompatible with the convention in that it allows for penalties (criminal sanctions on convention principles) to be levied on the estate, albeit that the criminal liability ceased at the date of death. However, the Revenue can still act in accordance with the convention if it chooses not to impose a penalty by exercising its discretion under section 102 and mitigates penalties to nil. However, as the Revenue has the power to act both in accordance with the convention and primary legislation, by reducing penalties to nil, then the principles of the convention seem to suggest it must do so, instead of waiting for a declaration of incompatibility by the courts.
There are several tax practitioners currently engaged in cases that may be affected by this point. It is imperative that the Revenue responds to this particular issue as quickly as possible so that estates under investigation can be finalised, and the beneficiaries receive their inheritance without unlawful penalty or delay. Special Compliance Office's initial response to this issue was that penalties risked in Europe were far higher than in the United Kingdom, and therefore the European cases were not relevant. However, there are a number of decided European cases where the penalty risked was equal to or lower than the levels currently applicable in the United Kingdom. See Kovexin SA v France (application 32509/96), Lechanczinski v France (application 29350/95), JJ v The Netherlands (application 21351/93).
District investigations
The opening of a normal section 9A enquiry is designed to be neutral. There are no allegations of wrongdoing; the Inspector is merely checking the return. However, this all changes, often in a meeting, when the Inspector alleges that there has been a tax loss due to fraudulent or negligent conduct, and indicates that penalties (usually under section 95) are to be sought. Leaflet IR73 is usually issued at the same time.
At that point the additional rights afforded by the convention come into play, principally those in Article 6.
This leaves the practitioner with a dilemma. It would surely be wrong to suggest that the convention should in any way interfere with the state's right to levy and collect taxes lawfully; therefore the question of correct liability, together with appropriate interest must be addressed. The question of penalties must also be settled, but on what basis? Often the question of additional tax is resolved by negotiation, usually based on a balance of probability, perhaps by way of a business economics model or private expenditure exercise. In our experience, the level of evidence presented to demonstrate additions to returned profits (on the balance of probability) is unlikely to be sufficient to prove the Revenue's case beyond all reasonable doubt – as would be required in any criminal matter. However, the threat of tax-geared penalties makes such an investigation a criminal matter in convention terms. Should the practitioner recommend settlement with the Inspector along traditional lines even though the offence, for penalty purposes, has not been proven to sufficient standards, or should he seek a tribunal hearing to resolve the penalty issue?
Tribunals
The appeal commissioners have been made aware that any tribunal must be carried out in accordance with the convention. While it is unlikely that Article 6, the right to a fair trial, will have much impact in straightforward proceedings regarding the administration of tax, it could make fundamental differences in contentious cases.
As regards the level of tax due (and the resulting interest charges), the Commissioners will hear the arguments from both parties as before. However, when considering the appeal against the penalty determination, the tribunal must have regard to the taxpayer's rights under Article 6. They must be satisfied beyond all reasonable doubt that he has committed the offence giving rise to a penalty charge. It is likely that much of the evidence produced by the Revenue may be inadmissible or, more likely, insufficient in criminal proceedings. This contrasts with the normal tribunal rule whereby the appeal commissioners can consider any lawful evidence, including hearsay, giving the evidence appropriate weight.
The tribunal may have to hear evidence wearing 'two hats', as is sometimes the case in the courts. Further, in penalty proceedings it may be a requirement for the Revenue to disclose its skeleton arguments and give the defence full access to any evidence in good time prior to any hearing, as opposed to simply agreeing a statement of facts as is currently the case. This is already, by and large, best practice in Special Commissioners' cases.
Additionally, in criminal proceedings the taxpayer must be presumed innocent from the outset and the onus will be firmly on the Revenue to prove its case to the appropriate standard. It is not difficult to imagine a situation where the Revenue successfully obtains a decision to impose further taxes and interest, but cannot prove its case for penalties. There remains some doubt as to the appropriate level of proof required to determine any additional tax due, as without additional tax there would be no tax-geared penalties.
Mitigation of penalties
The Revenue's leaflet IR73 indicates that it will reduce mitigation of the maximum penalties if the taxpayer 'resisted attending interviews'. This attitude is further demonstrated in the relevant Codes of Practice and the Inspectors' own instructions (Enquiry Handbook at paragraph EH348). By exercising his right to silence (or not attending meetings), a taxpayer will be viewed as unco-operative by the Revenue and may eventually suffer a higher level of penalties.
This is likely to be contrary to Article 6. Under the convention taxpayers have a right to silence and should not be punished for exercising that right.
Hansard
In cases of suspected serious fraud the Revenue states that it may accept a money settlement, following a full disclosure, instead of taking criminal proceedings, but it does not guarantee that this will be the case, and the threat of criminal prosecution remains. The Revenue appears effectively to induce a person to confess in order to secure a 'civil' settlement (including penalties) rather than face prosecution. Under the convention, such penalties are criminal sanctions, so the Revenue may effectively be inducing a taxpayer in that situation to waive his rights, particularly the right to silence. A number of specialists consider this to be completely at odds with Article 6.
Section 105 is believed, by the Revenue, to enable information provided under Hansard to be admitted in any subsequent criminal proceedings. Many specialists have long held the view that section 105 conflicts with sections 76 and 78, Police and Criminal Evidence Act such that self-incriminating material provided prior to a formal caution may be inadmissible in later proceedings. These concerns can only be further increased with the introduction of convention principles.
It is possible that self-incriminating material presently gathered prior to a formal caution may be inadmissible in criminal proceedings. Therefore the Revenue may not use such material provided by the individual, even if this was provided in an initial Hansard disclosure. It is likely that such proceedings would now include the collection of money penalties.
The potential impact of the Human Rights Act on Hansard cannot be underestimated and this matter must be urgently addressed. The current Hansard procedure, for all its faults, works relatively well, providing considerable benefit to the Revenue and a safety valve for clients with serious issues to disclose.
The Revenue may have little option but to remove the ambiguity within current procedures and come clean at the outset. This could be achieved either by issuing a caution and conducting a criminal investigation, or dealing with the case under Hansard which would preclude prosecution if a full disclosure was made. Similar issues may also affect the new approach to prosecution work being introduced by Customs.
Information powers
In most cases, the Revenue informally requests information to check returns, and when necessary, to conduct a more thorough investigation or enquiry. Inspectors are encouraged to issue formal production notices under section 19A, Taxes Management Act 1970, and increasingly under section 20(1). Potentially there are a number of current practices where the convention may be in point.
Can the Revenue require self-incriminating information from a first party? If the subject of the notice refuses to supply information which may incriminate himself, can the Revenue begin penalty proceedings for non-compliance? Remember the owner of the speeding vehicle! There must be serious doubts about the nature and extent of the information that the Revenue can lawfully require as it is clearly outside convention principles to penalise someone for exercising their human rights. Such a position is unlikely to reduce the Revenue's ability to secure information from third parties, using section 20(3).
A key point is that Revenue information powers must have appropriate authorisation, as discussed in Funke v France (application 10828/84). The substantive United Kingdom information powers do require judicial authorisation (whether by way of a commissioner, judge or magistrate). Some powers may be exercised by an appropriately authorised Inspector. Over-zealous use of information powers available to the Inspector may be an infringement of Article 8. Saunders v United Kingdom (application number 19187/91) and the recently reported case involving Saunders' co-defendants (Financial Times, 20 September 2000) suggest that information disclosed under an obligation (in the above cases to the Department of Trade and Industry) cannot subsequently be used to incriminate the supplier of that information.
Inspectors often request a voluminous amount of information from clients, especially regarding their private financial affairs and personal spending habits. Quite apart from the debate as to the relevance of that information to the return, in the early stages of an enquiry there may be a case to argue that such requests are indeed contrary to Article 8, being an unnecessary interference with their right to privacy. Where the Revenue can demonstrate a problem in the business records such a view may not prevail, but certainly in the initial stages of an enquiry where no deficiencies have been demonstrated, should the Revenue be able to intrude into a taxpayer's private affairs?
There are also implications for Revenue field visits to business premises (to obtain business economic information, especially in retail and catering trades), reviews of private premises, vehicle registration details, etc. It seems doubtful that the Revenue could demonstrate that such action is justified in a normal neutral self assessment enquiry opening. Indeed, such action is often taken before the appropriate notice of intention to enquire is issued.
A word of caution
The introduction of the convention principles generates a number of opportunities to safeguard the rights and protections available to clients; but those opportunities could be compromised if we, as a profession, do not act responsibly in this regard. Note the recent comments by Lord Woolf, Master of the Rolls. He has warned that a 'responsible attitude' should be adopted in raising arguments based upon the convention and that the courts should be 'robust' in rejecting inappropriate attempts to introduce it.
Open debate required
The introduction of the principles of the convention is a significant event, the true impact of which cannot be predicted, and may not be fully realised for many years to come. In the meantime, there will be uncertainty and doubt for everyone. It is therefore in the interest of taxpayers, the Revenue and the profession to identify and resolve the relevant issues as quickly as possible. It is hoped that the profession and the Revenue can embrace this issue and work together on a resolution.
Gary Rooney and Paul Lynam are both ex-Special Compliance Office investigators and are with KPMG's Tax Investigation department.

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