Human Rights

Human Rights

Delaying Justice

ANDREW WATTERS considers the Revenue's obligation to bring any prosecution within a reasonable time.

THE HUMAN RIGHTS Act 1998 was implemented into United Kingdom law in 2000. This gave binding force to Article 6 of the European Convention on Human Rights which, inter alia, gives an accused person the right to be tried in a reasonable time for the offence of which he is accused. David Corker's article, 'Criminal Tax Prosecutions' (see Taxation, 22 July 2004 at page 426) considered what impact this might have on the considerable delays sometimes experienced in those cases of tax evasion subject to investigation and prosecution by the Inland Revenue's Special Compliance Office.

The present article focuses on the potential impact which the European Convention on Human Rights' 'reasonable time' requirement might have on the Revenue's current ability to wield the stick of potential criminal prosecution in those cases, the vast majority, where alleged tax evasion is initially attacked by means of a civil investigation.

Starting from a particular catalyst, which might be a review of annual accounts, or from third party information, the Revenue will form the opinion that the affairs of a particular taxpayer merit investigation for tax evasion. Tax evasion is a broad term; it can cover a local tradesman not bothering to put some cash payments through the books and extend to sophisticated cross-border operations involving false invoicing and overseas companies whose existence is limited to a bank account in a sunny island.

From the initial information available to the Revenue, which is often fairly vague, a decision is taken that the degree of seriousness of the evasion is such that action should be taken in one of the following alternative ways.

Where prosecution seems unlikely

The majority of cases in the third category above are investigated from start to finish by the office that first launched the investigation and concluded by some sort of agreed settlement offer. However, in some instances the instigating office discovers that the nature of the tax evasion may be more abusive, and/or involve significantly more tax, than was initially suspected. In such circumstances, internal Revenue instructions require that the case be referred to Special Compliance Office. It will then be considered whether the case should be dealt with by the Hansard Group who will issue the Hansard statement, or whether the evasion uncovered is so offensive that it should go direct to the Prosecution Group who will launch a criminal prosecution.

In such cases, the fact, or at least reasonable suspicion, of evasion is often established fairly early. In cases where an investigation has been started with information provided under the Money Laundering Regulations SI 2003 No 3075, the Revenue may be starting with a strong suspicion, if not actual knowledge, of tax evasion, from the disclosure of suspected criminal activity made to the National Criminal Intelligence Service. Nonetheless, most cases will be dealt with by means of civil investigation, but often the major investigative effort is not to establish whether evasion has occurred, but to establish the full quantum of that evasion.

In the circumstances described above, the Revenue retains the right to switch to a criminal prosecution in the light of what it has uncovered in the civil investigation. In such cases, a very substantial period will often have elapsed between the point where tax evasion, a criminal offence, has been established to the Revenue's satisfaction, and the point where the taxpayer's right to a fair and public hearing under Article 6 is actually exercised.

Thus the three categories of investigating tax evasion outlined above should not be seen as self sufficient. Rather, they are starting points. In route A, there is no doubt that the final destination is a criminal prosecution. In route B, such a destination is identified as possible, but the taxpayer has the power to ensure the journey stops short of prosecution. In route C, few taxpayers have any idea that the outcome could be a criminal prosecution. It is nonetheless a possibility.

Delays on 'route A'

Mr Corker's focus was essentially on what this article has categorised as route A cases. His concern was with whether the often substantial delays by Special Compliance Office's Prosecution Group in bringing such cases to trial constituted a breach of Article 6 and he refers to Attorney General's Ref No 2 of 2001 [2003] UKHL 68 where the House of Lords considered two questions:

Their Lordships concluded as follows.

The judgment reflects the reluctance of the courts to undermine public confidence by withdrawing the right to prosecute alleged criminal offences in any but the most serious circumstances. However, Mr Corker identifies the phrase 'in most instances' as indicating a degree of latitude in their Lordships' judgment as to when the clock might start ticking to measure the delay and thus what might be unreasonable.

Delays on 'routes B and C'

For example, in route B cases it may be possible to argue that the clock should start ticking when the formal Hansard interview states that the possibility of a criminal prosecution exists. However, it is sometimes forgotten that there are more route C cases which end in criminal prosecution than route B cases. One reason for this is simply that there are a lot more standard investigations than Hansard investigations. Another possible reason is that the Hansard conditional guarantee of immunity from criminal prosecution tends to focus the taxpayer's mind to fulfilling the condition and avoiding prosecution. Whatever the reason, route C cases form a significant contribution to those that end in criminal prosecution and so should not be ignored in considering whether the right of a taxpayer to be tried for offences alleged against him in a reasonable time is being breached.

Circumstances which will lead the Revenue to consider whether a traditional civil investigation should be switched to an investigation that can lead to criminal prosecution is where the quantum of tax at risk is substantially more than that first anticipated (Special Compliance Office is seldom interested if the tax at stake is less than £100,000) or the nature of the evasion uncovered is particularly heinous (such as consistently false invoicing). It is thus possible to have a case with the following sequence of events:

Questions to be answered

From the above scenario some interesting questions arise.

First, does the initial establishment of evasion, which is a criminal offence, constitute the start of the ticking clock?

The Revenue is likely to argue that it does not and can point to the fact that, in Attorney General's Ref 2 (see above) their Lordships referred to the starting point of an individual being alerted to the likelihood of criminal charges. However, the Revenue position is not unassailable. When the Inspector working the case believes evasion has been established, then tax-geared penalties are in point and European Convention on Human Rights case law has established that such penalties are a criminal matter. There is thus an argument that the clock should start ticking when the Revenue should warn that a criminal penalty is in point.

Secondly, where the Revenue believes that tax evasion, a criminal offence, is in point, should it warn that a criminal prosecution is possible?

It is accepted that such an outcome is unusual. This is small comfort to those unfortunate few who are affected. This point also has ramifications for the principle of non self-incrimination (see below).

Thirdly, is it reasonable that the 'reasonable time' test for criminal prosecution should only start when the Revenue belatedly puts up the signpost letting the taxpayer see where he is going?

The Revenue may say that it tells the taxpayer as soon as the decision to prosecute is taken. However, it seems plausible for the taxpayer to contend that he should have known from an early point that criminal prosecution was a possibility. Just as one can argue that the clock should start ticking in Hansard cases when the possibility of criminal prosecution is raised in the Hansard warning, so one can argue that 'reasonable time' calculations should start when the case has established that penalties, a criminal matter, are likely to be in point.

Fourthly, is the taxpayer entitled to draw any inference from the Revenue's decision not to proceed via a criminal prosecution even when a criminal offence has been identified?

Behind this question is the paradox of a criminal offence, tax evasion, being initially treated as a civil matter but, in some instances, the ground rules being changed after the game has started to allow a switch to criminal prosecution. At least under the Hansard procedure the potential to change rules is made explicit to the taxpayer. This anomaly also raises the question of whether information which could not have been gained under Police and Criminal Evidence Act procedures, but which can be gained under the more lenient rules which apply to civil investigations should properly be used to support a switch to criminal prosecution. This question is perhaps better addressed in relation to another right under Article 6, the right not to self-incriminate, and this will be addressed in a subsequent article.

Andrew Watters is a partner with LevyWatters and can be contacted on 020 7931 8086 or 0161 980 8921. Website: levywatters.co.uk.

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