Hartley Foster explains how certain tax penalties can amount to ‘criminal’ charges under the European Convention on Human Rights… but tax-payers still have to pay them
The view that the Human Rights Act provides a panacea for all disgruntled and vexatious litigants is one that has been expressed frequently.
However, a recent case before the Court of Appeal shows that, even where an individual comes within the ambit of a Convention right, that in itself may not be sufficient to enable the individual to succeed.
On 3 July, the Court of Appeal in Han & Yau v Customs & Excise affirmed in a majority decision the principle that certain tax penalties can amount to criminal charges under the Convention. However, having concluded this issue, the court then went out of its way to indicate that this should have little effect on the way that customs investigates such matters. This important decision has raised a number of questions, and this article aims to offer a few answers.
What is a criminal charge under the Convention? The Strasbourg authorities have considered that the concept of a ‘criminal charge’ has an autonomous meaning, so that the classification in domestic law is not determinative. It is, however, relevant. If the matter is categorised as ‘criminal’ by domestic law, then, no matter how trivial the offence and/or the penalty, it will be treated as a criminal charge under Article 6.
Conversely, if the penalty is treated as civil in domestic law, then that domestic classification can be ignored and two further criteria applied to determine whether it is criminal, namely, the nature of the offence; and the nature and degree of severity of the penalty that the person concerned risked incurring.
When assessing the first of these criteria, factors such as whether the offence is of general application or limited to an identifiable sub-group (which suggests that it may be of a regulatory kind rather than a criminal charge) are to be considered.
With regard to the second criterion, if the domestic court has the power to impose imprisonment then, normally, this will be sufficient for the proceedings to be defined as criminal. In the event that imprisonment is not available, then the penalty is likely to be treated as a criminal charge if it is ‘substantial’, has a deterrent purpose and is punitive.
If a matter is criminal under the Convention, does it follow that the matter becomes criminal under domestic law?
No. The classification of a charge as criminal for the purpose of Article 6 is a classification for the purposes of the Convention only. Consequently, if the penalty is categorised as a criminal charge under the Convention this simply means the taxpayer is entitled to the express safeguards set out in the Convention. It does not mean the taxpayer necessarily becomes entitled to UK criminal protection under, for example, the Police and Criminal Evidence Act 1984.
Does categorisation of a civil penalty as a criminal charge change the standard of proof?
No. It has been suggested that if the criminal provisions of Article 6 apply, then the ‘prosecution’ will have to prove its case to the usual criminal standard, ‘beyond reasonable doubt’.
However, this is incorrect. Article 6 guarantees the right to a fair trial, but it does not set out how this right is to be protected. Strasbourg has never expressed an opinion on the ‘correct’ standard of proof that applies to criminal cases; and, indeed, given the wide variety of judicial systems in place in Convention countries, it would be surprising if it did. As long as the trial itself is objectively fair, then Strasbourg will not interfere.
Which penalties are likely to be ‘criminal’?
Clearly, the answer to this will depend on identifying the particular penalty and applying the Strasbourg principles to it. Lord Justice Potter specifically identified the VAT misdeclaration penalty; and the implication of his remarks is that this penalty is unlikely to be criminal, since it is fundamentally regulatory in nature and the maximum penalty is capped at 15% of the VAT lost.
There are several other VAT penalties that are capped at 15% of the VAT lost; and it may be that Customs & Excise will argue that this fact alone means that such penalties cannot be criminal for Convention purposes. The Strasbourg jurisprudence gives some support for such a view, as there is, as far as I am aware, no reported case where a penalty as low as 15% (without the sanction of imprisonment in default) has been treated as criminal.
Obviously, however, the size of the penalty is only one factor.
In contrast to indirect tax, penalties for direct tax are more commonly geared up to the full amount of tax lost. It is likely that, following Han & Yau, these sorts of penalties will be regarded as criminal for Convention purposes. Anomalously therefore, the statutory capping of penalties in indirect tax may well mean fewer indirect tax penalties are regarded as criminal than direct tax penalties, notwithstanding that the penalties in both cases are serving essentially the same purpose from the point of view of the tax authorities.
This anomaly is all the more pronounced, if, as the Court of Appeal suggested, mitigation is ignored for the purpose of assessing whether or not a penalty is criminal. Although it would seem to me that it must be the maximum, rather than the actual, penalty that is considered, it does mean that even where two penalties are identical in terms of percentage of tax lost, one may be criminal and the other civil.
The good news for tax payers is that Article 6 applies to certain tax penalties. This decision may also have implications for other areas of law, where substantial ‘civil’ penalties can be imposed, such as, for example, the new offence of “market abuse” under the Financial Services and Markets Act. However, if taxpayers consider that, because of this decision, they will no longer be liable to pay such penalties, then they are considerably mistaken.
Hartley Foster is a barrister in the tax litigation practice at KLegal.
