Upper Tribunal considers HMRC’s discretion to bring civil or criminal proceedings

Background

HMRC have the power to impose civil penalties for VAT errors (deliberate or otherwise) under Schedule 24 to the Finance Act 2007.  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, such officer may be liable to pay a portion of the penalty at HMRC's discretion (known as a personal liability notice or "PLN").  In cases of suspected tax fraud or evasion, HMRC can also start a criminal investigation and subsequently make a charging recommendation to the Crown Prosecution Service.

In this case, HMRC had assessed a £12.8m civil penalty against Intekx Limited (“Intekx”) for deliberate inaccuracies contained in its VAT returns from 2009 to 2013. As the sole director of Intekx, Mr Hackett subsequently received a PLN from HMRC for the same sum. It was effectively alleged by HMRC that Mr Hackett knew that the transactions underlying Intekx’s penalty assessment related to the fraudulent evasion of VAT.  As a civil matter, HMRC’s case against Mr Hackett in the First-tier Tribunal (Tax Chamber) (“FTT”) was required to meet the civil standard of proof (i.e., the balance of probabilities). 

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. As later remarked upon the Upper Tribunal, it is very unusual for a potential defendant to argue that he would prefer to be subject to criminal rather than civil proceedings - his motivation being to secure the higher standard of proof in criminal proceedings (which requires a jury or magistrate to be sure that an offence has been committed), as well as certain rights only available in criminal proceedings (such as the right to trial by jury and protection against self-incrimination).  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.

The appeal to the Upper Tribunal

The Upper Tribunal found in favour of HMRC and dismissed the appeal.

When considering whether HMRC had abused the FTT’s process by bringing criminal allegations in a civil context, the Tribunal noted that an abuse of process would only have occurred if that abuse directly affected the fairness of the hearing before the FTT. The decision made by HMRC could not be challenged in the FTT for being improper per se, but only for having potentially unfair consequences. With this in mind, the Upper Tribunal examined the actual statement of case lodged by HMRC against Mr Hackett. As there were no allegations of a criminal offence (i.e., dishonesty or fraud) having been committed specifically contained in that document, there was no indication of any manifest unfairness to Mr Hackett. It was, therefore, not possible for the FTT to have determined that there was an abuse of process based on the statement of case.  The Upper Tribunal concluded that the decision to bring civil proceedings was entirely a matter for HMRC, but that such decision could be amenable to judicial review proceedings in the High Court in appropriate cases.

In respect of the standard of proof issue, and consistent with earlier judicial decisions, the Upper Tribunal 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. 

Comment

As noted above, the taxpayer's request in this case was highly unusual and the specifics of the Upper Tribunal's decision may therefore be of little wider relevance.  However, the case does highlight the sometimes fine line that HMRC have to tread when assessing behaviour which might be regarded as "deliberate" on the one hand (which would be a civil matter) and "fraudulent" on the other (which clearly would be a criminal matter).  

Taxpayers facing a potential criminal investigation should always therefore consider whether it might be worth approaching HMRC with a (civil) settlement proposal.  Although this is not something to which HMRC would generally be receptive once a criminal investigation is underway, a settlement is always something that should be considered by defence teams.  Clearly this will depend on the nature of the potential offences and the specific circumstances of the case (HMRC would not consider a civil settlement for the most egregious cases of tax fraud or evasion).

In the case of individual taxpayers, HMRC can use Code of Practice 9 / the contractual disclosure facility where they suspect that a fraud has occurred but believe it to be more beneficial to resolve the matter as a civil fraud rather than prosecute criminally (usually where their evidence is not considered strong enough to secure a prosecution or where a person voluntarily discloses their offending).  This may not be an option for those already under investigation as it is designed for cases where a criminal investigation has not already started but it does demonstrate the way in which HMRC can sometimes be pragmatic when deciding whether to pursue a criminal prosecution.  Equally, corporate bodies under criminal investigation could consider a deferred prosecution agreement in order to settle any offences.  It is worth noting that, under both these settlement options (contractual disclosure facilities and deferred prosecution agreements), a taxpayer would be expected to make a full voluntary disclosure of all offending due and settle all amounts due.

Any taxpayers currently facing civil or criminal proceedings from HMRC should consult their legal advisors on appropriate next steps. If you would like further information on any of the above or how Bird & Bird could assist, please contact a member of our specialist Tax Disputes and Investigations team. Our team is dedicated full time to the resolution of disputes with tax authorities and offers unique access to tax specialists in addition to strength in defending civil penalties and criminal prosecutions brought by HMRC.