Striking-out criminal penalty proceedings: the impact of Article 6 ECHR
The Upper Tribunal has upheld the FTT’s decision to strike out most of the taxpayer’s appeal against a “deliberate” conduct penalty of £1.4m either as an abuse of process, or because it had no reasonable prospect of success (CF Booth Limited v The Commissioners for Her Majesty’s Revenue & Customs [2022] UKUT 00217 (TC)). The case is important because (i) it confirms that Article 6 protected proceedings are not immune from the Tribunal’s case management powers, (ii) it confirms that the test for “deliberate” conduct post-Tooth in the Supreme Court does not require dishonesty, and (iii) it confirms that where a taxpayer is found to have known that its transactions were connected with fraud then that will amount to “deliberate” conduct.
CF Booth Ltd (“CFB”) was found to have known that its transactions in scrap metal were connected with the fraudulent evasion of VAT (see CF Booth Ltd -v- The Commissioners for HM Revenue and Customs [2017] UKFTT 813 (TC) (“the denial decision”)). It subsequently received a Schedule 24 penalty on the basis that the inaccuracy in its VAT return was “deliberate” because at the time it submitted its return it knew that its transactions were connected with fraud, but submitted the VAT return reclaiming input tax anyway.
Grounds 1 and 2 – Knowledge of connection with fraud is not “deliberate” behaviour: CFB submitted that knowledge found in the denial decision did not amount to deliberate conduct for the purposes of the penalty assessment. It argued that for there to be a “deliberate inaccuracy” the Revenue had to prove, and had not proved in the underlying proceedings: (i) the knowledge of the Appellant, at the time, that the relevant VAT returns were completed incorrectly: that is to say, knowledge on the part of the Appellant that in all the circumstances it was not entitled to claim input tax (which it was argued required dishonesty), and (ii) the Appellant intended that the Revenue should rely on the VAT returns as accurate documents.
The UT rejected those arguments. The UT referred to Auxilium Project Management Ltd -v- HMRC [2016] UKFTT 352 (TC), with approval (see paragraph 37). It then rejected the submission that there was any requirement to allege or establish dishonesty on the part of a taxpayer when an allegation that the conduct was “deliberate” was alleged (see paragraphs 40 and 41). It was said that nothing in Tooth in the Supreme Court called this into question.
CFB also argued that prior to release of the denial decision the required or conscious element in relation to deliberate inaccuracy had not been established. Prior to the denial decision, CFB said, the position was uncertain or “inchoate” as regards its entitlement to claim input tax and that the Revenue would have to prove the employee who completed and filed the VAT return knew that they were inaccurate. The Tribunal had “no hesitation in rejecting those submissions”. It found that the denial decision had concluded CFB never had any entitlement to input tax decisions as a result of the Kittel principle because it knew before submitting its returns that the transactions were connected with fraud. The denial decision merely identified and confirmed CFB’s existing state of knowledge, such knowledge disqualifying it from entitlement to an input tax deduction in the first place.
The UT found that there must have been an intention to mislead at the time the VAT return was submitted because Regulation 25 of the Value Added Tax Regulations 1995 which regulates the contents of a VAT return has a declaration that the information is true and complete. Therefore, at the time of submission there must have been an intention to mislead. Finally, it was noted that the First-tier Tribunal (Tax Chamber) (“the FTT”) had properly struck the case out on Johnson -v- Gore Wood broad merits based principles as opposed to issue estoppel. The UT found the FTT was entitled to do this.
Ground 3 – The power to strike out a penalty protected by Article 6: It was argued that as the penalty was a “criminal charge” domestic principles as to abuse of process or issue estoppel were not applicable.
The UT found that the Article 6 protection did not preclude a Court of tribunal from striking out an action or giving summary judgment (see paragraph 56). It went on and found that although the penalty may be a “criminal charge” tax penalties are conducted in civil tribunals and are governed by the Tribunal Rules which are essentially civil in nature with the effect that criminal procedure and evidence rules do not apply (see paragraph 57). All that is required in tax penalties where article 6 is engaged is, “broad assessment of whether the particular charge brought against the Appellant is dealt with in a manner which provides a fair hearing when the proceedings are viewed as a whole” (see paragraph 58).
Howard Watkinson and Joshua Carey represented HMRC.
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