Illegal and Criminal

VINCENT CURLEY reports on the implications of the Court of Appeal's decision in the Han and Yau case and on the likely impact of the decision for the tax penalty régime.

The taxpayers in Commissioners of Customs and Excise v Han were issued with estimated VAT and excise duty assessments and civil penalties for alleged dishonest evasion of the taxes. The procedures adopted by Customs and Excise to investigate evasion of VAT and excise duties are the same. The taxpayers were not informed of their right to silence and instead were coerced to dispense of this right by threat of high penalties if they did not co-operate. They had no right to an interpreter even if their knowledge of English was limited and if they wanted to exercise their right to appeal to the Tribunal they had no entitlement to legal aid.

For anyone with clients who have received these types of penalties then it is likely you will also have seen a substantial estimated tax assessment based on the scantest of information and the penalty (fine) set as a percentage of these tax estimates.

The Tribunal had decided as a preliminary issue in an earlier hearing that the penalties imposed under section 60, VAT Act 1994 and section 8, Finance Act 1994 were 'criminal in nature' within the meaning of Article 6 of the European Convention on Human Rights. Customs appealed the decision to the Court of Appeal who held, by a 2:1 majority (Lord Justice Potter and Lord Justice Mance; Sir Martin Nourse dissenting), that the President of the Tribunal had been correct (see [2001] STC 1188). The Court of Appeal also gave some indications as to how far the decision would be likely to affect other civil penalties and civil evasion cases in particular.

The importance of the issues here can be seen by the speed with which the courts have considered these appeals. The President of the VAT and Duties Tribunals, Stephen Oliver QC, released the Tribunal's decision on 19 December 2000 and the Court of Appeal Hearing took place on 3 and 4 May 2001. It was then only just over eight weeks until the Court of Appeal handed down its judgment on 3 July 2001. Mr Han and Mr Yau may be forgiven for not appreciating the speed of the proceedings because their full appeals are still to be determined by the Tribunal and we first started acting in their penalty appeals in 1998.

Implications for civil penalties

Some commentators have expressed the view that this decision means the end of the civil penalty régime and taxpayers will now face prosecution instead of action being confined to a financial penalty. Here it is interesting to see what the Court of Appeal has to say.

Lord Justice Potter gave the lead decision and he commented that he made his decision 'reluctantly'. He says that he did this because he is convinced that the penalty régime as a whole is a just balance between the 'legitimate interests of Customs and Excise in improving the collection of a tax in relation to which widespread evasion was prevalent, the interests of the taxpayer in avoiding the travails of a criminal prosecution and the stigma of conviction of a criminal offence of dishonesty in cases of deliberate evasion'. He goes on to say that he was not ' aware of any widespread dissatisfaction or allegations of injustice in relation to the procedures followed since the adoption of the [civil penalty régime] by legislation'.

With all due respect to what Lord Justice Potter has to say, he has not seen, nor was there evidence before the Court of Appeal, about the real difficulties taxpayers have faced under the current régime. No doubt Lord Justice Potter took this view because of the way Customs had presented their case, which can best be described as claiming the results of their losing would be a 'doomsday scenario'. Part of the decision specifically deals with two aspects of Customs' doomsday argument, that is the effects on inducements and the application of the Police and Criminal Evidence Act 1984 to civil evasion investigations. In respect of the former, Customs were arguing that their losing would render obsolete the whole inducement procedure because it would contravene both the right to silence and the right against self-incrimination.

Lord Justice Potter says that he regards this as unlikely, saying that all is needed is something being said to the taxpayer in addition to what is now laid down in Notice 730, the new wording spelling out precisely what the obligations are of a person to talk to Customs or otherwise and the results of their doing so or not doing so. In respect of the Police and Criminal Evidence Act 1984 he says it by no means follows that because a penalty is criminal in nature the full provisions of that Act or all its criminal codes will be applicable automatically. These apply to the criminal law and how far parts of them or similar rules will apply in the VAT and Duties Tribunal appeals will have to be decided in future cases.

Customs' solicitors have confirmed they are already working on a form of wording for a new caution to be used in 'civil' investigations. The most likely consequence for the future is that the civil evasion régime will survive, but there will have to be built into the procedures the basic rights to which taxpayers are entitled. Interpreters will now have to be made available for interviews when there are language difficulties and I would argue there must be advance disclosure before interviews take place rather than the drip feeding of evidence and ambushes during interviews which were features of the now defunct civil régime.

The first major impact of this decision will be on Tribunal appeals and this impact will not be seen until cases begin to be heard again in the Tribunal and decisions establish a body of case law. Again this is an area where many views have been reported. Early opinion was that all penalties may be void and taxpayers who have suffered penalties in the past should now be considering suing Customs. I will certainly be advising clients who have had penalties imposed in the past to actively consider an appeal to the Tribunal, but I will also be advising these clients of the prospects of success based on the case against them when the admissible evidence is served. Out of time appeals may also be involved, so the question of how far back this decision will reach has still to be determined.

Tribunal appeals

The impact on appeals in the Tribunal lies within Article 6 of the European Convention on Human Rights which provides:

(1) In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.

(2) Everyone charged with a criminal offence shall be presumed innocent until proved guilty according to law.

(3) Everyone charged with a criminal offence has the following minimum rights:

(a) to be informed promptly, in a language which he understands and in detail, of the nature and the cause of the accusation against him;

(b) to have adequate time and facilities for the preparation of his defence;

(c) to defend himself in person or through legal assistance of his own choosing or if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require;

(d) to examine or to have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him;

(e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court.

The right to free legal assistance and an interpreter will greatly affect those appellants entitled to this help, but the hearings themselves will be affected in only a very limited way. Adequate time to prepare the defence is always allowed by the Tribunal if requested. The areas, which are likely to produce considerable changes to hearings in future, are also those of the greatest assistance to appellants. These arise out of the right to have the nature and cause of the accusations against the taxpayer notified in detail under Article 6(3) and the right of a fair trial as envisaged by Article 6(2) of the Convention, where it provides that every person shall be presumed innocent until proven guilty.

Disclosure of case

In my view Customs must now fully disclose the case against appellants and this is not achieved by their serving their statement of case, list of documents and witness statements in the manner they have in the past. This point has already been argued in the Tribunal as a preliminary issue, on the basis that Customs are required to produce statements detailing all of the evidence they intend to rely upon at the hearing of the appeal and must also produce unused material, as this will often assist the appellant's case. The decision of Stephen Oliver QC is awaited, who reserved these arguments for his personal decision.

The right to silence

Although not expressly mentioned in Article 6, it is implicit that the right to silence is inherent in the article, whether it be as a right to a fair trial under Article 6(1) or as a part of the presumption of innocence in Article 6(2).

This does not mean that interviews will automatically be ruled inadmissible. However, whatever wording may have been used by individual officers in individual interviews, one thing is certain and that is that the wording of the present Notice 730 does not contain sufficient, or indeed any, indication that a person has a right to remain silent. If the Tribunal finds that what was said to a taxpayer did inform him of his rights to silence and non-self-incrimination, then it is likely to allow to be heard the evidence of the 'inducement interview'. If it considers that these rights were not satisfactorily explained, then it is likely to exclude that interview from its deliberations. In reality most, if not all, interviews will be ruled inadmissible.

The standard of proof

There are two standards of proof in the English courts, the civil 'balance of probabilities' and the criminal 'beyond all reasonable doubt'. The courts have also established a third burden where there are allegations of dishonesty and this is the 'balance of probability to a high degree'. However, this third standard has not always survived on appeal to the higher courts. The Court of Appeal decision does not decide what is the correct standard of proof. The judges said when handing down their judgment that the reference in paragraph 12 to the First Indian Cavalry Club Limited decision (see [1998] STC 293), which said the standard was the lower civil balance of probability test, is not part of the decision itself. Whatever the Tribunal finally decides, it must be inevitable a high standard will apply and trying to discern the difference between 'beyond all reasonable doubt' and 'a balance of probabilities to a high degree' is in practice impossible.

The burden of proof

Section 60(7), VAT Act 1994 provides:

'On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners'.

The subsection (1)(a) and (b) referred to provide:

'(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability).'

From this it may be assumed that in respect of the remainder of the matters to be proved, e.g. the amount of tax evaded, the burden of disproving this is on the appellant. This is not so and the Tribunal has already started to look at these matters in the recent decision by Mr Theodore Wallace in the case of Ajay Chandubhai Kumar Patel v Commissioners of Customs and Excise (LON/99/1144) given on 18 May 2001. Mr Wallace observed in relation to the burden of proof:

'It might be argued that the burden of proof only rests on the Commissioners in respect of the dishonest act or omission and not as to the amount evaded, since section 60(7) would otherwise simply refer to the matters specified in subsection (1). In fact this involves the logical difficulty that the amount evaded flows from the dishonest conduct and depends on its extent. In the light of Article 6.2 we conclude that the entire legal burden lies on the Commissioners, although in most cases where dishonesty is established the quantum can readily be inferred.'

Mr Wallace went on to say:

'Rule 7(1)(b) [of the VAT Tribunal Rules, SI 1986 No 590] requires an appellant to serve a defence setting out the matters and facts on which he relies and Rule 7(2) provides that the Commissioners are not required to prove any matter admitted in the defence. A defence was served in the present case.

'We do not see how the requirements of Rule 7(1)(b) can be reconciled with Article 6.1 of the Convention and the implicit right to silence except on the footing that the appellant is not obliged to state any matters or facts which do not advance his case. We do not consider that admissions obtained without any reference to the right to silence can be utilised. Nor can we reconcile the unqualified obligation on an appellant to serve a List of Documents pursuant to Rule 20(1) and 20(2)(a) with the right to silence – see Funke France [1993] 16 EHHR 294 at 314 (cited at [2000] BTR 243). The Tribunal Rules are secondary legislation, enacted under paragraph 9 of Schedule 12 to the VAT Act 1994; the primary legislation is purely permissive and does not prevent removal of the incompatibility (see section 3(2)(c) of the Human Rights Act 1998). In any event since the penalties form part of measures to prevent evasion under Article 22.8, they must comply with Community law which takes account of the Convention. If incompatible with the Convention, Rules 7(1)(b) and 20(2)(a) are contrary to Community law. Incompatibility of this type cannot be within the margin of appreciation of Member States.'

In summary, the appellant does not have to prove anything; all matters must now be proved by Customs.

Direct taxes

The High Court found similar penalties imposed in direct taxes were criminal. The judge in the Court of Appeal noted this decision and commented:

'I have had drawn to my attention the decision of Mr Justice Jacob in King v Walden (HM Inspector of Taxes) [2001] STC 822 in which, applying the criteria as considered in the Strasbourg authorities to which I have referred, and persuaded by the analysis and reasoning of the Chairman in this case, he held that the system for imposition of penalties for fraudulent or negligent delivery of incorrect tax returns or statements is 'criminal' for the purposes of Article 6(2). In doing so, he plainly went further than the decision in this case, the reasoning in which is premised upon penalties in respect of dishonesty. However, whereas the conclusions of Mr Justice Jacob go further than those which I have expressed, they are not in any way inconsistent with them'.

Direct tax practitioners will now be well advised to keep a close eye on the future decisions of the VAT and Duties Tribunal which will press ahead in deciding the full implications of the decision by the Court of Appeal.

Other penalties

A lot of people have been eagerly awaiting the decision in Han and Yau to see what effect it would have on other Customs penalties. Lord Justice Potter gives little away on this subject, saying his decision will afford 'little guidance' in this respect. The difficulty he points out is that the penalties under these other provisions have a maximum rate of 15 per cent of the lost tax. It may be the three judges in this case would not regard this as sufficiently severe a penalty as to denote criminality, but this remains unclear.

My firm is also acting in many other human rights test cases in the Tribunal concerning misdeclaration penalties, late registration penalties, default surcharges, the demand for security, the admissibility of evidence in tax appeals and the refusal to restore seized excise goods and vehicles. If any are found not to be criminal in nature, then these appeals should also resolve the basic question of whether a tax appeal is a 'civil obligation' under Article 6. These appeals are currently in the process of being listed to determine the human rights issues as preliminary points.

The vast majority of appeals against the lesser penalties come under the heading of whether there was a reasonable excuse, that is the liability to the penalty is accepted but there are mitigating factors to be put forward. The 'criminal charge' status may not add much to appellants' prospects of success in these type of appeals, but the real gain for appellants could be in arguing the Tribunal must have full powers to determine the appeal rather than being restricted to a supervisory role.

However, there are also misdeclaration penalties which amount in monetary terms to substantial fines, even set at 15 per cent of the tax, because they are imposed on large corporations who underpaid substantial amounts of VAT. There are also many cases where Customs undertake investigations in identical circumstances as in the case of Han and Yau but instead decide to impose a misdeclaration penalty. The elements of the cases are very similar with allegations of dishonesty and the penalties are still set at a percentage of what can often at best be described as an estimate of tax based on an officer's interpretation of very limited information. There remain many issues to be argued and determined.

The future

Customs were granted leave to appeal to the House of Lords but may decide not to do so. The Court of Appeal decision no doubt gave some comfort to Customs. Lord Justice Potter's comments envisage that a 'civil' régime can be devised, which is compatible with the European Convention on Human Rights and also implies that individual appeals will need to be heard to deal with past breaches of Convention Rights. From the taxpayer's point of view, the decision remains a major breakthrough as it confirms taxpayers will now at last have basic rights and recourse to the Tribunal when those rights have been breached with the prospects of success in their appeals.

Vincent Curley Associates is acting for Mr Han, Mr Yau and the other appellants in this appeal and a further 14 appeals selected by the Tribunal as test cases to decide the implications of the Human Rights Act on indirect tax appeals. If readers have any enquiries please contact: Vincent Curley AIIT, 25 Spring Lane, Flore, Northants NN7 4LS; telephone 01327 340298; Fax 01327 349579; Email vjcurley@aol.com

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