Civil or criminal proceedings for serious fraud?

This article was first published in Tax Journal on 30 October 2020

6 November 2020

The recent Upper Tribunal decision in L Hackett v HMRC is an important judgment for both tax and criminal litigators alike. The judgment provides useful guidance on why pursuing an individual taxpayer via civil penalties for deliberate errors in VAT returns, rather than instituting criminal proceedings for tax evasion, does not amount to an abuse of the tribunal process. It clarifies that the burden of proof in tax tribunal cases will be judged to the civil (as opposed to the criminal) standard, even when the underlying allegation amounts to a ‘serious fraud’. It has practical application to other cases where there are parallel tax tribunal and criminal proceedings.
 

HMRC’s criminal investigation policy makes it clear that it will tackle tax fraud by civil investigation procedures wherever possible, with criminal investigations reserved for the most egregious of offending. It is therefore highly unusual for an appellant in the tax tribunal to argue his case is so serious it should only be dealt with by way of a criminal investigation. However, that is exactly what happened in the Upper Tribunal case of L Hackett v HMRC [2020] UKUT 212 (TCC).

The Hackett case

In 2016, Mr Lindsay Hackett (LH), the sole director of a company called Intekx Ltd (Intekx) appealed to the First-tier Tribunal (FTT) against the decision of HMRC to issue him with a personal liability notice (PLN) in the sum of £12,833,984.49.
 
HMRC contended that there were deliberate, and in some cases deliberate and concealed, inaccuracies in Intekx’s VAT returns and that these inaccuracies were wholly attributable to LH as sole director of the company. HMRC had issued a PLN to LH under its powers in FA 2007 Sch 24 para 19, which provides that, where the penalty is payable by a company for a deliberate error which was attributable to an officer of that company, such officer may be liable to pay a proportion of the penalty (up to 100%) at HMRC’s discretion. In short, HMRC’s case against LH 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.
 
LH raised a number of preliminary issues at the FTT case management hearing to support his appeal against the PLN. All of these arguments were rejected by the FTT and LH appealed to the Upper Tribunal (UT). This article will  focus on the two principal arguments advanced by LH in the UT, namely:
  • that HMRC’s decision to issue LH with a PLN, rather than prosecuting him in a criminal court, amounted to an abuse of the FTT’s process; and
  • that the appropriate burden of proof in LH’s FTT proceedings was the criminal and not the civil standard.

Abuse of process

LH’s argument to the UT was that the proceedings should be stayed because the decision by HMRC to pursue the PLN through the FTT had the effect of prosecuting a criminal allegation of serious fraud in a tax tribunal. This deprived LH of his constitutional rights including the right to trial by jury, the criminal standard of proof and the privilege against self-incrimination. This, he argued, amounted to an abuse of the FTT’s process.

Somewhat unsurprisingly, given that no criminal proceedings of any type had actually been instigated against LH, the UT gave this argument short shrift. Particular attention was paid to the Court of Appeal’s judgment in Han & Yau v C&E Commrs [2001] 1 WLR 2253, which refers to passages from the 1983 Keith Report (a report which recommended a system of civil sanctions in VAT cases of fraud and negligence, later enacted by VATA 1994 s 60). The report, statute and subsequent case law makes 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’.

Although it was not referred to in the judgment, HMRC’s current criminal investigation policy makes it clear that it will deal with fraud by use of the cost effective civil fraud investigation procedures wherever possible, and that: ‘Criminal investigation will be reserved for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate.’

On this basis, only the most egregious of tax frauds should be investigated and prosecuted by HMRC. The irony of LH’s position, which was not lost on the UT, was that he was effectively arguing that the allegations against him in the tribunal were so serious that they could only be dealt with in criminal proceedings. As the judgment states (at para 50): ‘Although Mr Burton [on behalf of LH] submitted that it was an unusual situation for a taxpayer to be pursued in civil proceedings for a very substantial civil penalty in relation to a serious fraud, it appears to us very unusual for a potential defendant to argue that he would prefer to be subject to criminal rather than civil proceedings.’

Indeed, those who stand accused of serious tax fraud would normally be mightily relieved not to face criminal proceedings, including the prospect of dawn raids; a lengthy criminal investigation/prosecution; potential conviction and sentence to imprisonment; and draconian confiscation proceedings. Yes, there are safeguards in place in criminal proceedings to protect defendants, but that is because the consequences of a criminal conviction go far beyond pure financial penalties.

Jurisdiction

The UT recognised that in appropriate cases the FTT does have jurisdiction to provide protection against abuse of its processes by use of its case management powers under the overriding objective of rule 2(2) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273, which requires the FTT to deal with cases fairly and justly. However, the UT held that the jurisdiction of the FTT is limited to situations where the events complained of have implications for the fair hearing of a tax appeal. LH complained that the FTT process was abusive because HMRC had issued a PLN, rather than prosecute him criminally. This decision, the UT held, did not go directly to the fairness of the hearing before the FTT but to whether or not HMRC acted lawfully in exercising its discretion to issue a PLN. Such a decision is, in theory, susceptible to judicial review in the Administrative Court, but the FTT does not have judicial review jurisdiction.

Standard of proof

LH argued that given the serious nature of the allegation made, namely that he had been knowingly involved in fraud, the burden of proof required to prove the case against him should not be the civil standard of the balance of probabilities, but the criminal standard of beyond reasonable doubt.

There are a number of authorities which demonstrate the courts’ willingness to embrace the criminal standard or a quasi-criminal standard of proof in cases which are civil in nature but where the severity of the consequences are such that a higher burden of proof is required. These include cases where there is a particular stigma or restraints on freedom (such as those imposed by sexual harm orders or football banning orders) where a heightened standard of proof is merited.

However, as the UT made clear, the issue of penalty appeals in the FTT is not the type of situation where a heightened standard of proof is required, even where the underlying issue is ‘serious fraud’. The leading case on the appropriate standard of proof in tribunal proceedings is Khawaja v HMRC [2014] STC 150, which takes its lead from civil fraud proceedings and confirms that there is only one standard of proof in such cases: the civil standard.

Wider applicability

In some ways, Hackett is a unique case: there are not many appellants who would seriously argue that they should be prosecuted criminally, rather than have their case heard in the tax tribunal. However there are issues raised in the judgment which go beyond the specific circumstances of LH’s appeal and are applicable to other cases where there is tax/criminal crossover.

Parallel proceedings

The judgment suggests that there is unlikely to ever be a situation where the FTT itself is capable of considering an abuse of process hearing concerning HMRC’s decision to pursue a taxpayer for a civil penalty. That HMRC has discretion to bring proceedings in the tribunal, even when there are underlying allegations of serious fraud, is certainly not in doubt. But what about a situation, unlike in Hackett, where a criminal investigation or prosecution for tax evasion is already underway? 

It is common practice in tribunal cases where there is a linked criminal case to stay the tribunal proceedings pending the resolution of the criminal matter. Waiting until the  criminal proceedings are complete can have advantages to HMRC as it allows them to build the case and use evidence which becomes public during the criminal process. In a case where the defendant is convicted, that fact is also likely to be admissible in the tribunal proceedings. However, FA 2007 Sch 24 para 21 provides that a person is not liable to a penalty in respect of an inaccuracy or failure in respect of which the person has been convicted of an offence. There would therefore seem to be little incentive for HMRC to ‘wait and see’ in civil penalty notice cases, particularly because there is no corresponding provision to the effect that if a penalty has been imposed on a taxpayer he cannot be prosecuted for a criminal offence in respect of the same behaviour.

In circumstances when HMRC decides to pursue both civil and criminal proceedings simultaneously, it will be down to the appellant to consider an application to stay. Whilst the decision to issue a penalty notice by HMRC may only be susceptible to challenge by way of judicial review, the fairness of continuing tribunal proceedings in circumstances where there is a risk of prejudicing a defendant’s rights in criminal proceedings, must be capable of argument in the FTT.

In civil litigation outside of the tribunal process the civil courts retain a discretionary power to stay proceedings pending the outcome of related criminal proceedings. A court may stay whole or part of any proceedings if there is a risk of ‘serious prejudice’ to the criminal case and no appropriate safeguards that can minimise the risks of injustice (see Akciné Bendrové Bankas Snoras v Antonov and another [2013] EWHC 131).

As per the civil courts, the FTT has a discretionary power to stay and, it is submitted, is fully entitled to do so in cases where a continuance of proceedings risks causing serious prejudice to parties engaged in ongoing criminal proceedings. The ruling in Hackett, that the FTT did not have jurisdiction to consider the lawfulness of HMRC’s decision to bring civil proceedings, can be distinguished from other cases where the tribunal process itself may prejudice an ongoing criminal case. In Hackett, there was no separate criminal investigation or prosecution at all, so the risk of prejudice to LH caused by the tribunal process was theoretical at best.

Final thoughts

The Hackett case highlights the complexity of issues that need to be considered by practitioners in tribunal cases where there is an underlying tax fraud allegation. The judgment confirms that HMRC has a free ranging discretion (subject to overall fairness) to instigate civil and/or criminal proceedings during the course of such cases. This means that proceedings in the respective forums cannot be dealt with in isolation, and practitioners must adopt a strategic and joined up approach to avoid prejudice to their clients.

This article was first published in Tax Journal on 30 October 2020

Further Information

For further information on the issues raised in this blog, please contact a member of our Criminal Litigation team in confidence.

 

About the Author

David Sleight is a Partner in the criminal litigation team who regularly acts for individuals and companies in high profile cases. He specialises in defending tax evasion and fraud allegations brought by HMRC and has developed a specialist expertise in advising in cross border tax litigation involving Mutual Legal Assistance requests between Member States.

 

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