Commissioners v Khawaja [2008] EWHC 1687 (Ch), [2008] All ER (D) 227 (Jul)
Chancery Division
Mann J
17 July 2008
Assessment to penalties under s 95 of the Taxes Management Act 1970 (TMA 1970) falls to be considered under the civil, not criminal, standard of proof.
Adam Tolley (instructed by solicitor for Revenue and Customs) for the Commissioners. Tim Hirst for the taxpayer.
The taxpayer was the controlling director of a company which ran a restaurant from which he received remuneration. He submitted tax returns for the years 1993–4 to 1998–9 in which he declared the amounts he had received by way of remuneration, benefits in kind and rental income. The Commissioners considered that he had under-declared his income and raised their own assessments, estimating the amounts they believed he had received.
Following a High Court challenge to those assessments, the Commissioners served a notice claiming penalties under s 95(1)(a) of TMA 1970 for: “negligently submitting incorrect returns...for the years [referred to above]”. The taxpayer appealed to the general commissioners. They held that the taxpayer had not been shown beyond reasonable doubt to have negligently understated income in respect of remuneration for the years in question.
The commissioners appealed by way of case stated. The issue arose as to whether the general commissioners had erred in applying the criminal standard of proof to the issues of whether there had been negligent submission of incorrect returns and whether or not there had been understated profits. The commissioners argued that the standard of proof was the civil standard of the balance of probabilities.
MR JUSTICE MANN:
His lordship considered, Re B (children) (sexual abuse: standard of proof ) [2008] All ER (D) 134 (Jun). It was clear that there were categories of case which, though technically civil, were capable of attracting the criminal standard of proof.
There was nothing express in s 95 of TMA 1970, or indeed anywhere else in the Act, which made it clear what the standard of proof was on any challenge to an assessment to such a penalty; nor was there anything implicit elsewhere in the Act. To that extent, the income tax legislation differed from the VAT legislation. Accordingly, the matter had to be decided using principles acquired from elsewhere.
A useful starting point was R (on the application of McCann and others) v Crown Court at Manchester; Clingham v Kensington and Chelsea Royal London Borough Council [2002] 4 All ER 593.
There could be no doubt that the proceedings in the instant case were civil. They were in complete distinction to parallel criminal proceedings which could be brought for fraudulent tax evasion, and they covered ground (negligence) which could never sensibly be the subject of criminal proceedings in cases such as the instant. Although the word “penalty” was used, that was far from determinative. The penalties were first raised by a notice issued by the Commissioners. There were only ever any proceedings if that notice was challenged. That was not a criminal-type procedure. It was plainly a procedure allied to a civil recovery procedure. There was nothing criminal about it. That, therefore, gave the starting point of a presumed civil standard of proof.
There were cases in which the consequences were so serious, or the nature of the claim was such, that the imposition of a criminal standard of proof was required. There was no binding authority directly in point in relation to income tax penalties, but there were pointers elsewhere in the authorities.
Civil standard of proof
His lordship referred to the Keith Report (1983, Cmnd 8822). It was pursuant to that report thatthe VAT penalty code was introduced. It assumed that a civil penalty system for dishonesty in relation to income tax required proof only to the civil standard. It was on the basis of that that the VAT penalty code was recommended, with proof to the same standard.
His lordship considered further Han v Comrs of Customs and Excise, Martins v Comrs of Customs and Excise, Morris v Comrs of Customs and Excise [2001] 4 All ER 687 and Khan v Revenue and Customs Comrs [2006] STC 1167. The tenor of the VAT cases was that the civil standard of proof applied to the system of VAT penalties. It was true that the statutory context was different, and that additional arguments could be made on the wording of the VAT statutes than were available in relation to the income tax regime. However, that did not make a material difference. The apparent intention of the legislature was to provide something within the VAT regime which was parallel to the income tax regime. In that context, it was plainly assumed that the civil standard of proof applied to the income tax regime, and the VAT scheme was mimicking that. That was notwithstanding the fact that the VAT regime was confined to fraud, and negligence was not sufficient. If the civil standard applied in relation to civil fraud so far as VAT is concerned, then there was no reason in principle why it should not apply to such matters in relation to income tax, and negligence was then an a fortiori case.
That being the case, it was necessary to consider whether the position was changed by the enactment of the Human Rights Act 1998.
The commissioners accepted that proceedings for penalties of the kind which were in issue in the instant case, were criminal proceedings for the purposes of art 6 of the European Convention on Human Rights. That meant that certain specific procedural safeguards applied. However, the standard of proof was not dealt with by Art 6. It was quite plain from the decision in Han that one did not move seamlessly from a determination that proceedings were criminal for the purposes of art 6 to introducing all the domestic law consequences of proceedings being criminal.
It was plain that Art 6 did not automatically introduce the criminal standard of proof. If it was to be introduced there had to be separate reasons for doing so. None had been identified. Accordingly, that provision did not help the taxpayer. The appeal would therefore be allowed.
