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/ Legal Articles / Tax Fraud - A civil and criminal issue

Tax Fraud - A civil and criminal issue



Nicola Sharp of Rahman Ravelli assesses a case that clarifies HM Revenue and Customs’ scope for deciding whether to bring criminal or civil proceedings.

The decision handed down by the Upper Tribunal (UT) on 6 July 2020 in Lindsay Hackett v The Commissioners for Her Majesty’s Revenue & Customs [2020] UKUT 0212 (TCC) was notable for confirming that the choice of whether to bring civil or criminal proceedings is to be made by HM Revenue and Customs (HMRC).

Under Schedule 24 to the Finance Act 2007, HMRC has the power to impose civil penalties for VAT wrongdoing, whether it was done in error or on purpose. Under paragraph 19 of Schedule 24, where the penalty is payable by a company for a deliberate error which was attributable to an officer of that company, HMRC can issue a  personal liability notice (PLN) against this officer to pay some or all of the penalty. In cases of suspected tax fraud, HMRC can also commence a criminal investigation. 

The Hackett case

In 2016, Mr Lindsay Hackett, the sole director of a company called Intekx Ltd appealed to the First-tier Tribunal (FTT) against the decision of HMRC to issue him with a PLN in the sum of £12.8 million. HMRC contended that there were deliberate – and in some cases deliberate and concealed - inaccuracies in Intekx’s VAT returns from 2009 to 2013. HMRC said that these inaccuracies were wholly attributable to Mr Hackett, as the sole director of the company. HMRC’s case against Mr Hackett was that he (on behalf of Intekx) deliberately made inaccurate claims for input tax on transactions that he knew were connected to the fraudulent evasion of VAT. 

Mr Hackett had applied to the FTT for a stay of proceedings on the basis that, given the serious nature of the allegations against him, HMRC should instead have initiated criminal proceedings against him - and that the decision by HMRC to proceed by way of a civil PLN was an abuse of process. He argued that pursuing him in civil proceedings (as opposed to criminal) deprived him of his constitutional rights; including the right to trial by jury, the criminal standard of proof and privilege against self-incrimination. 

This, he argued, amounted to an abuse of the FTT’s process. 

In the alternative, if the civil proceedings were to be continued, Mr Hackett sought a direction for the criminal standard of proof to be applied due to the severity of the consequences for him. The FTT rejected both submissions and Mr Hackett appealed to the Upper Tribunal.

Upper Tribunal’s Decision 

The UT found in favour of HMRC and dismissed the appeal. In relation to whether criminal proceedings should have been instigated, particular attention was paid by the UT to the Court of Appeal’s judgment in Han & Yau v C&E Commrs [2001] 1 WLR 2253 [30-36]. This case refers to passages from the 1983 Keith Report, a report that recommended a system of civil sanctions in VAT cases of fraud and negligence, later enacted by the Value Added Tax Act 1994, s 60. The report, statute and subsequent case law make it clear that the decision to instigate civil or criminal proceedings in any given case is entirely a matter for HMRC to regulate, subject to the views of courts and tribunals as to overall fairness.

The policy reason for this is to allow HMRC the flexibility to choose how best to tackle tax fraud, particularly in cases where it may be difficult to obtain proof to the criminal standard. A criminal investigation can be extremely lengthy and resource heavy with no guarantee of conviction. It makes sense for HMRC to exercise its discretion and to pursue only those cases which are ‘sufficiently heinous to justify a prosecution’.

In respect of the standard of proof issue (and consistent with earlier judicial decisions) the UT confirmed that the only circumstances in which the criminal standard of proof would be applied to civil proceedings are when the consequences of the proceedings are so serious that the higher criminal standard is appropriate.

The UT also extensively reviewed the previous case law in relation to the FTT’s jurisdiction to stay proceedings for abuse of process, noting that the alleged abuse fell outside of the Tribunal’s jurisdiction because it was not related to the fairness of the proceedings themselves. It is now clear that a party who wishes to make such an argument will have to do so in the Administrative Court through a claim for judicial review

Conclusion 

The taxpayer's request in this case was highly unusual and the specifics of the UT's decision may, therefore, have few if any wider consequences.  However, the case highlights both the fine line that HMRC has to tread when assessing taxpayer behaviour in such circumstances and its discretion to instigate civil and/or criminal proceedings. 

Nicola Sharp

Nicola Sharp

Legal Director

nicola.sharp@rahmanravelli.co.uk
+44 (0)203 910 4567 vCard

Specialist Areas of Practice: International Regulation and Corporate Crime, Fraud and Business Crime, Civil Fraud, Corporate Investigations

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