COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM
Mr Justice Hart
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CARNWATH
LORD JUSTICE LLOYD
| Mohammed Siddiq KHAN
|- and -
|HM Revenue and Customs
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel No: 020 7421 4040 Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Christopher Vajda QC and Nicola Shaw (instructed by HM Customs & Excise) for the Respondent
Crown Copyright ©
Lord Justice Carnwath:
The statutory provisions
Registration and Assessment
"… deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced." (s 73(9))
"The genesis of the code is to be found in the 1983 Keith Report. That had reported on the desirability of introducing into the VAT enforcement regime a civil penalty system akin to that available to the Inland Revenue in respect of other taxes. Attention was drawn inter alia to the difficulties and expense of obtaining proof of VAT offences to a criminal standard. It also gave support to the desirability of encouraging the co-operation of the taxpayer in the investigative process." (para 43)
In Han, Potter LJ observed that the civil penalty regime provided –
"… a just balance between the legitimate interests of the Commissioners in improving the collection of tax in relation to which widespread evasion was prevalent and the interests of the taxpayer in avoiding the travails of a criminal prosecution and the stigma of a criminal offence of dishonesty in cases of deliberate evasion." ( STC 1188 para. ).
We were told that the regime is regarded by Customs as a cost effective use of resources for investigating all but the most serious cases of VAT evasion; and that in the five years to March 2004, approximately 2,500 civil evasion penalties were issued, compared with approximately 380 criminal prosecutions.
"(1) In any case where-
(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),
he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct…"
Subsection (7) provides that on an appeal against an assessment to a penalty –
"… the burden of proof as to the matters specified in subsection (1) (a) and (b) above shall lie upon the Commissioners."
Reference has also been made in argument to subsection (4). This provides (in summary) that, in any subsequent criminal or recovery proceedings, statements are not rendered inadmissible by the fact that they may have been encouraged by offers of the possibility of more lenient treatment under the civil penalties regime. The amount of the penalty may be reduced in limited circumstances by Customs or the tribunal (s 70).
"… except in so far as it is necessary to reduce it to the amount which is appropriate under section ".
"The penalty which the law imposes is an amount equal to the VAT evaded, but the Commissioners or a VAT Tribunal, have the power to mitigate (lessen) the penalty as they think proper.
The Commissioners will not normally order criminal proceedings where a person has been invited to co-operate but, where applicable, they reserve the right to do so."
"What happens first?
The investigating officer will
- Interview you;
- Explain the CEP procedure; and
- Ask you to co-operate in establishing your true VAT liability.
The officer will explain why it is felt that any underdeclaration arises from dishonest conduct on your part, but will listen to any explanations that you, or your adviser, wish to give. If you have a satisfactory explanation for the discrepancy, a CEP will not apply."
It also explained the benefits of co-operation –
"You can reduce the penalty significantly by promptly disclosing full details of your true VAT liability and by the extent to which you co-operate over the whole enquiry."
Details were given of the percentage mitigation normally expected for different levels of co-operation.
"… may prosecute in the event of a false disclosure being made to the investigating officers, but will not use the information gathered in a civil investigation in a criminal prosecution of the same offence."
The case before the tribunal
"79. … the tribunal accepted that it was a mean figure assessed by analysis of 17 books. The price should therefore be taken into account as well as the figure of £7.70 being the average of the figures taken from the two books obtained by Customs Officers from the business premises.
80. Therefore we take the view that it is fair and equitable to base the assessment on an average ticket price of £6.84 (£5.99 + £7.70 = £13.69 ÷ 2 = £6.84). This will have the effect of reducing the assessment and the subsequent penalty."
"87. No explanation at all has been offered for the suppression of sales. Neither Mr Khan nor his accountant gave evidence at the Tribunal. The Appellant has refused to accept the calculations produced by Customs' Officers. However, we do note that Mr Khan has changed his story since his initial interview. He now maintains that approximately 18.5 ticket books are used per year and that the average ticket price is £5.99. Such a change can only be regarded as a deliberate attempt to mislead the Officers.
88. We find Mr Khan's dishonesty can readily be inferred from his conduct. His actions were obviously dishonest and he must have known that the ordinary person would have so regarded them."
Issues on the appeal
i) Unfairness at the interview;
ii) Breach of Article 6 at the hearing;
iii) Burden and standard of proof;
Unfairness at the interview
"(9) Persons other than police officers who are charged with the duty of investigating offences or charging offenders shall in the discharge of that duty have regard to any relevant provision of … a code."
In particular he relies on the failure to give a formal caution in the form specified in paragraph 10.4 of PACE namely:
"You do not have to say anything. But it may harm your defence if you do not mention when questioned something which you later rely on in court. Anything you do say may be given in evidence."
"32. He was not formally cautioned but was told that Customs had reason to believe that there may have been an evasion of VAT. It was also mentioned that it was a civil matter and not a criminal investigation and he was at liberty to leave at any time."
"  It by no means follows from a conclusion that Article 6 applies that civil penalty proceedings are, for other domestic purposes, to be regarded as criminal and, therefore, subject to those provisions of PACE and/or the codes produced thereunder, which relate to the investigation of crime and the conduct of criminal proceedings as defined by English law…."
"…Gill does not compel the conclusion that the officers conducting the interview were "charged with the duty of investigating offences". They were charged with the duty of investigating whether the appellant's VAT affairs were being conducted in accordance with the law and, if of the view they were not, of investigating whether a civil penalty should be exacted…." (para 58)
In any event, there was nothing in Gill to support the view that failure to comply with the Code, even if applicable, would have rendered the evidence inadmissible in the VAT proceedings. Finally, Mr Young had failed to identify any particular aspect of the interview which could be categorised as unfair.
Breach of Article 6 at the hearing
The issue before the judge
"(a) (the tribunal) ought to have considered the gravity of the charges against Mr Khan and made inquiry as to whether Mr Khan's rights to a fair hearing would be infringed"
I infer that this was treated without objection as an additional ground of appeal.
"Mr Young's submission was, in essence, that the appellant had been incompetently represented before the tribunal by Mr Arifeen, that the tribunal ought to have been alert to his incompetence, and that it ought to have ensured that Mr Khan was aware of his right to be legally represented if he so chose. "
Mr Young relied on three specific points, which he said should have alerted the tribunal to Mr Arifeen's inadequacy. First was Mr Arifeen's use of the description "Statement of Case" to describe the document submitted by him, rather than "Defence", which is the term used by the rules. Second was the fact that he was willing to represent Mr Khan, in spite of being a potential witness himself. Third was Mr Arifeen's failure to call Mr Khan as a witness.
"[to tell] Mr Khan that if he were unable to afford legal representation, the Legal Services Commission did make aid available for the provision of legal representation at penalty appeals before the Tribunal. Only after providing this information for Mr Khan's consideration should the tribunal have determined to carry on with hearing the appeal."
"When the evidence is relevant to the appeal an official transcript of the relevant evidence must be obtained…
If evidence relevant to the appeal was not officially recorded, a typed version of the judge's notes of evidence must be obtained."
Those provisions are primarily directed to grounds of appeal, which require review of the actual evidence before the lower court or tribunal. In principle they may also be relevant to allegations relating to the conduct of the proceedings, in so far as the procedural steps have been recorded or noted. In either case, the tribunal is only required to provide its notes so far as they are relevant to a ground of appeal.
"… they went partly to the question of the fairness of the hearing before the Tribunal and partly sought to introduce evidence which could have been, but was not, adduced by the appellant below. I admitted those statements so far as they related to the former question and allowed them to be read in relation to the latter. This was on the footing that they could not be relied on as evidence in this appeal so as directly to contradict the Tribunal's findings of fact. My purpose in allowing them to be read at all was to enable me to form a view as to whether, if persuaded that there was any question of the appellant's Article 6 rights having been infringed, the outcome of the proceedings before the Tribunal might have been materially affected thereby."
Again, that was a generous, but (in the absence of any sustained objection by Customs) understandably pragmatic, approach. Strictly, the bulk of the evidence was inadmissible.
"I did not give evidence at the appeal, although I would have been willing to do so. Mr Arifeen decided that it was not necessary to call me. He based his case on the analysis he carried out. If his analysis was accepted, this would have meant that the takings for the period concerned, would have been under the threshold for registration, and ended the matter."
On the question of representation, he says:
"I did not know that I could have been granted legal aid for my appeal in the tribunal. If I had known I could have received legal aid then I would have wanted a lawyer or specialist to represent me in the Tribunal."
"I have spoken to Mr Arifeen and he confirmed to me that he had not previously represented anyone in an appeal before the tribunal. He also said that he had never previously represented a taxpayer at a tape-recorded interview under the Notice 730 procedures.
I note that Mr Arifeen does not appear to have understood the rules of evidence in relation to Tribunal appeals as he did not call any evidence at the hearing."
He does not explain further what evidence should have been called.
The issues on the appeal
"The learned judge erred in law in that … although a lawyer at the hearing of the VAT tribunal did not represent me when Counsel represented Customs and Excise, I nevertheless had a fair hearing notwithstanding my rights under Article 6 of the convention on human rights."
However, in granting permission to appeal, following an oral hearing at which Mr Young appeared, Waller LJ summarised the issue as being –
"… the extent to which Article 6 should have obliged the Tribunal to take an active role in scrutinising the quality of the representation that Mr Khan had."
They are distinct points. The first is a general point about equality of arms, and the lack of legal representation. The second is a specific point about the relative incompetence of Mr Arifeen. I shall attempt to deal with both.
"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." (6(3)(c))
"Certainly, in itself the appointment of legal aid defence counsel does not necessarily settle the issue of compliance with the requirements of Article 6(3)(c). As the Court stated in its ARTICO judgment:
'The Convention is intended to guarantee not rights that are theoretical or illusory but rights that are practical and effective . . . . [M]ere nomination does not ensure effective assistance since the lawyer appointed for legal aid purposes may die, fall seriously ill, be prevented for a protracted period from acting or shirk his duties. If they are notified of the situation, the authorities must either replace him or cause him to fulfil his obligations.'
Nevertheless, 'a State cannot be held responsible for every shortcoming on the part of a lawyer appointed for legal aid purposes.' It follows from the independence of the legal profession of the State that the conduct of the defence is essentially a matter between the defendant and his counsel, whether counsel be appointed under a legal aid scheme or be privately financed. The Court agrees with the Commission that the competent national authorities are required under Article 6(3)(c) to intervene only if a failure by legal aid counsel to provide effective representation is manifest or sufficiently brought to their attention in some other way." (emphasis added)
Mr Young submits that it should have been "manifest" to the tribunal that the appellant was not being effectively represented by Mr Arifeen, and that it should have taken steps to ensure that he was able to defend himself effectively.
"Provided that the analysis for the 1999 period could be got before the Tribunal, that strategy could be implemented without having to call the appellant himself, and exposing him to cross-examination. The appellant's difficulty was that, apart from his own DGT records, there was no accounting material on which he could rely in respect of the relevant period apart from that being relied on by Customs. His further difficulty was that he had given inconsistent accounts of the numbers of books used by him in the relevant period, and had been unable to provide an explanation for the discrepancy adverted to in Officer Heuston's letter of 18th January 1999 (referred to at paragraphs 37 and 38 of the Tribunal Decision). Mr Arifeen may have taken the view (and may have had good reason to take it) that exposing the appellant to cross-examination was unlikely to improve his position."
That strategy had been partly successful in securing a reduction of the assessment and the penalty. In any event there was nothing in this point, which should have warned the tribunal that "some egregious mistake" was being made in the appellant's representation (para -).
"… given the inconclusive evidence (Customs) for the numbers of ticket books used per year and the inadequate method used to derive the average ticket price, the case against him by (Customs) has not been proved."
"The burden of proof is on the Appellant to show that his turnover did not exceed the threshold and that the assessment was not made to best judgment. The burden of proof is upon the Respondents to show that the Appellant dishonestly evaded tax."
Burden of proof
The issue between the parties
"That analysis may, in some other case, present the Tribunal with a difficulty where the probabilities on the evidence are seen as at all finely balanced. In the present case, however, where the appellant chose not to adduce evidence himself, the analysis is entirely academic. In practice Customs both assumed and discharged the burden of showing that the appellant had been trading above the threshold during the relevant period. The Tribunal did not approach this question simply by asking themselves whether the decision by Customs to register the appellant compulsorily had been made to Customs' best judgment on the material before it at the time, but approached the issue as one of fact on the evidence before it." (para )
"The tribunal had to consider whether the section 73(1) assessment had been made to the best judgment of Customs and correctly approached that task in the light of the guidance given by the authorities to which it was referred. It then proceeded, again in accordance with those authorities, to focus on whether the amount of the assessment should be sustained in the light of the material available before it. It therefore had directly to consider for itself what the amount of the assessment should be. Given the nature of the material before it, I find it difficult to see how the potentially differing burdens of proof on the questions of the amount of the assessment on the one hand and the question of the amount of VAT evaded on the other could as a practical matter produce different results." (para )
"For instance, an Appellant charged with a civil penalty as a named officer under s61 would be unable to challenge the quantum of the assessment against his company without his company agreeing to enter an appeal against the assessment. It should be noted that s61 is often used where a company is insolvent and there is little or no possibility of appeal."
Furthermore, in suggesting that the point was academic on the facts of this case, the judge had failed to take into account that there was more than one plausible approach to the assessments of the amount of tax, and that Mr Khan's approach was supported by the original observations of the Customs officers.
"… in a case such as this, where the tribunal is also considering the quantum of the assessment to which the penalty is referable, the effect of that burden is likely to be academic."
"The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." (Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC per Lord Lowry).
That was confirmed by this court, after a detailed review of the authorities, in Customs and Excise Commissioners v Pegasus Birds Ltd  STC 1509;  EWCA Civ 1015. We also cautioned against allowing such an appeal routinely to become an investigation of the bona fides or rationality of the "best of judgment" assessment made by Customs:
"The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment." (para 38(i))
It should be noted that this burden of proof does not change merely because allegations of fraud may be involved (see e.g. Brady v Group Lotus Car Companies plc  STC 635, 642 per Mustill LJ).
"The appellant accepted that there is a longstanding decision in planning law, Nelsovil Ltd v Minister of Housing and Local Government  1 WLR 404, which has been generally regarded as placing the burden of proof on the appellant in an enforcement notice appeal. That view was developed in the leading judgment of Widgery J and pungently summarised by Slade J at page 409 of the report:
"It is a novel proposition to me that an appellant does not have to prove his case."
… The general principle that the appellant must prove his case seems to be unassailable…" (paras 43-44)
i) It is the appellant who knows, or ought to know, the true facts.
ii) Section 60(7) makes express provision placing the burden on Customs in relation to specified matters. This suggests that the draftsman saw it as an exception to the ordinary rule, and seems inconsistent with an implied burden on Customs in respect of other matters.
iii) The distinction is also readily defensible as a matter of principle. Mr Young relied on "the presumption of innocence" under Article 6 of the Convention, but he was unable to refer us to any directly relevant authority. The presumption clearly justifies placing the burden of proof on Customs in respect of tax evasion and dishonesty; but once that burden has been satisfied, a different approach may properly be applied (compare R v Rezvi  1 AC 1099;  UKHL1, in relation to confiscation orders in criminal proceedings).
iv) In relation to the calculation of tax due the subject-matter of the assessment and penalty appeals is identical. This link is given specific recognition by section 76(5) (allowing combination in one assessment). It would be surprising if the Act required different rules to be applied in each case.
v) Section 73(9) provides that the assessed amount, subject to any appeal, is "deemed to be an amount of VAT due…" In a case where either there was no appeal against the assessment, or the penalty proceedings followed the conclusion of any such appeal, this provision would appear to preclude any attempt to reopen the assessment for the purpose of assessing the penalty. The subsection does not apply directly where, as here, the penalty appeal is combined with an appeal against the assessment, and the assessment has not therefore become final, but it indicates another link between the two procedures. (I do not see the provision as necessarily confined to enforcement, as Mr Young argues. Nor in the present context do I need to spend time on his argument that this interpretation could cause unfairness in proceedings against a third party under section 61, although I note that under that provision there appears to be a general power to mitigate the penalty.)
vi) To reverse the burden of proof would make the penalty regime unworkable in many cases. In a case such as the present, a "best of judgment" assessment is needed precisely because the potential taxpayer has failed to keep proper records, so that positive proof in the sense required in the ordinary civil courts is not possible. The assessment may be no more than an exercise in informed guesswork. Indeed to put the burden on Customs would tend to favour those who have kept no records at all, as against those who have kept records, which are merely inadequate, but may be enough to give rise to an inference on the balance of probabilities.
" … As a matter of ordinary language, it seems clear to me that Section 73(1) involves two issues where they are both being fought, as here. The first is to determine whether the person concerned has failed to make any returns required under this Act, which in this case involves the Tribunal satisfying itself on the evidence before it whether or not the trader's turnover would or was reasonably expected to exceed £55,000. If so satisfied, the Tribunal would then go on to consider the assessment by reference to determining whether the Commissioners had indeed made the assessment to the best of their judgment.
 The point is reinforced when one considers a case where the Commissioners have simply registered a trader for VAT and he appeals against that decision, without there being any assessments against which he has appealed. In those circumstances, Miss Shaw, I think realistically, concedes that the Tribunal would make its own assessment, based on the evidence before it and the balance of probabilities, as to whether or not there has been a failure to make returns "as required under this Act", i.e. in a case such as this, whether, on the evidence before it, the Tribunal considers that the trader's turnover exceeds or is reasonably likely to exceed £55,000. It would be very odd if the proper approach to determining whether or not there has been a failure to make returns required under this Act depended on whether or not there happened to be a challenged assessment at the same time.
 Miss Shaw makes the point that, in a case such as this, if the argument which I favour is correct, then there is a slightly odd double requirement of the Tribunal: first, to decide on the evidence before it and the balance of probabilities whether, in this case, the turnover of the appellant exceeded or is likely to exceed £55,000; secondly, on a more familiar reviewing Wednesbury type approach, whether the Commissioners' assessment was to the best of their judgment.
 I think there is something in that point, but I do not find it particularly powerful. In each case the tribunal is being asked to look at different things. The first is whether the turnover exceeds, or is likely to exceed, a particular figure on the evidence before it. The second is whether, on the evidence before them, the actual figure for turnover, which resulted in the VAT assessment of the Commissioners, was one arrived at to the best of their judgment. If slightly different questions involve slightly different approaches to the burden of proof or other matters, it is not that surprising. Certainly there is nothing so surprising in the result that it justifies what seems to be to be a re-wording of Section 73(1), which is what the Commissioners' argument involves."
The present case
Standard of proof
"… When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence…
Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established…" (p 586E-H).
"This was that (the tribunal's) reduction of the assessment to take account of the average price of £5.99 indicated by Mr Arifeen's analysis proceeded on a methodologically unsound basis. That £5.99 figure had been based on a total of 8,500 tickets whereas (or so the submission assumed) the £8.23 and the £7.70 averages had each been based on books of 500 tickets. To find the true average one should divide the total turnover by the total number of tickets. If one did that then the average price was closer to £6.16 than the £6.84 arrived at by the Tribunal. The Tribunal had made the mistake of averaging the averages without taking account of the number of tickets involved in each calculation."
"Using the £5.99 figure to take account of that possibility was not wholly irrational. For want of anything more solid, it was one way of acknowledging the possibly untypical nature of the two random samples. To have accorded it the weight given to it by Mr Young's submission would, however, have tended towards the irrational in light of the Tribunal's other findings, since it would have treated the 1999 figures as a whole as being typical of those likely to have applied for the period in question. The tribunal plainly did not think that they were."
Lord Justice Lloyd:
Lord Justice Buxton:
The application of the Police and Criminal Evidence Act 1984 [PACE] to the VAT evasion regime
While Article 6 of the Convention guarantees the right to a fair trial, it does not lay down any rules on the admissibility of evidence as such, which is therefore primarily a matter for regulation under national law.
"The classification of a case as criminal for the purposes of art 6(3) of the Convention, using the tests established by the Strasbourg jurisprudence, is a classification for the purposes of the ECHR only. It entitles the defendant to the safeguards provided expressly or by implication by that article. It does not make the case criminal for all domestic purposes. In particular, it does not, necessarily, engage protections such as those provided by the Police and Criminal Evidence Act 1984"
That, with respect, must be so. It is trite law that the Convention operates an autonomous regime of classification, and that the criteria under that regime for determining whether proceedings are criminal are to be found in the jurisprudence of the ECtHR, dating from Engel v Netherlands (1979-80) 1 EHRR 647. Those criteria are the domestic classification of the proceedings; the nature of the offence; and the severity of the penalty to which the subject is at risk. Of these, the first, the domestic classification, is only a starting point: Benham v UK (1996) 22 EHRR 293. If the domestic law does classify the proceedings as criminal, then that will conclude the issue under the Convention. But, as Han itself demonstrated, even if the domestic regime is specifically distinguished from domestic criminal proceedings, as the VAT evasion regime is so distinguished by section 60(6) of VATA, it may still be found to be "criminal" in nature under the Convention. As the ECtHR said in Engel, at its §81, "the autonomy of the concept of 'criminal' operates, as it were, one way only". Accordingly, although proceedings can be classified as criminal under the Convention when they are not so classified in domestic law, such a Convention decision cannot affect, and is recognised in the jurisprudence cited above as being quite different from, the classification of proceedings in domestic law.
"The statement of the Chancellor of the Exchequer ….made it quite clear that, while in cases of tax fraud the revenue will be influenced by a full confession in deciding whether to accept a money settlement….it gives no undertaking to do so or to refrain from instituting criminal proceedings. Tax fraud involves the commission of a criminal offence or offences, so that it is in our view evident that the role of the SCO investigating tax fraud involves the investigation of a criminal offence."
The present case is quite different. Far from the Commissioners conducting the interview in order to uncover material for a subsequent prosecution, the purpose and background of the interview, as set out in detail by the judge in §58 of his judgment, was to investigate whether a civil penalty should be imposed: and it is that penalty, and no other, that has been imposed on Mr Khan. No doubt, as the judge also observed, if the Commissioners were to bring a prosecution, and seek to rely on the contents of the interview, then it might be held, in those criminal proceedings, and in the light of the manner of their prosecution, that the role of the investigators had to be reviewed. But that is not this case.
Breach of Article 6 at the hearing