The High Court remitted an appeal to the general commissioners for further hearing of an appeal against the imposition of penalties for undeclared profits where the commissioners had wrongly applied the criminal standard of proving beyond reasonable doubt that there were understated profits instead of the usual civil standard of the balance of probabilities.

Facts

The taxpayer was the controlling director of a company which he ran as a restaurant. He received remuneration from the restaurant and submitted tax returns for the years 1993–94 to 1998–99 in which he declared the amounts he had received for each of those years in respect of remuneration from the restaurant, benefits in kind and rental income. The Revenue considered that he had under-declared his income and raised its own assessments, estimating the amounts it believed he had obtained.

The taxpayer appealed against those assessments first to the general commissioners and then to the High Court where Lawrence Collins J reduced the income assessed under each of the heads, but left significant sums owing on the assessments (see Khawaja v Etty (HMIT) [2004] BTC 233).

The total amount of the difference between the final amounts owing on the assessments and the original amounts of income declared by the taxpayer was £238,500. The difference in tax was around £82,600. There were assessments in respect of his remuneration, benefits in kind and income from the property from which the company traded and which was apparently owned by him.

After the hearing, the Revenue served a notice claiming penalties under TMA 1970, s. 95(1)(a) for negligently submitting incorrect returns under s. 8 of that Act.

The taxpayer appealed to the general commissioners who found, inter alia, that, applying the criminal standard of proof beyond reasonable doubt, the taxpayer had not been shown to have negligently understated income for the years in question. The Revenue appealed arguing that the commissioners should have applied the civil standard of proof on the balance of probabilities.

Issue

Whether the commissioners had erred in applying the criminal standard of proof.

Decision

Mann J (allowing the appeal) said that the proceedings in cases such as the present were undoubtedly civil, as opposed to criminal. 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 this. Although the word ‘penalty’ was used, that was far from determinative. The penalties were first raised by a notice issued by the Revenue and there were only ever any proceedings if that notice was challenged as in this case. That was not a criminal-type procedure but was plainly a procedure allied to a civil recovery procedure. There was nothing criminal about it which, therefore, gave the starting point of a presumed civil standard of proof.

It was clear that the Keith Report (1983, Cmnd 8822) assumed that a civil penalty system for dishonesty in relation to income tax required proof only to the civil standard and it was on that basis that the VAT penalty code was recommended, with proof to the same standard. The assumptions made by the Keith Report, unchallenged by anyone, gave strong support to the submission that the civil standard of proof would be applicable to dishonesty cases under the income tax regime, and a fortiori to negligence cases such as the present.

The civil standard of proof applied to the system of VAT penalties. Although the statutory context was different and additional arguments could be made on the wording of the VAT statutes than were available in relation to the income tax regime, 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. This 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 was concerned, 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. Whatever the numbers might be in relation to the two taxes, the stamping out of evasion in both was equally desirable. It was apparent that parallel regimes had been put into place, albeit with different wording, in the various statutes, and it seemed to be sensible that the same standard of proof should apply. Accordingly, the correct standard of proof was the civil standard (1st Indian Cavalry Club Ltd v C & E Commrs [1998] BTC 5,030, Han & Yau v C & E Commrs [2001] BTC 5,328 and Khan (t/a Greyhound Dry Cleaners) v R & C Commrs [2006] BTC 5,267 considered).

Chancery Division.
Judgment delivered 17 July 2008.