Khan v Revenue and Customs

Classification of a civil VAT evasion penalty as criminal for Convention purposes gives the taxpayer the safeguards required by article 6. It does not convert the proceedings into domestic criminal proceedings or automatically engage the Police and Criminal Evidence Act 1984.

On a penalty appeal, Customs must prove intentional VAT evasion and dishonesty. The taxpayer bears the burden of establishing the correct amount of tax. A tribunal must intervene in a party’s chosen professional representation only where ineffective representation is manifest or sufficiently brought to its attention.

A dry-cleaning proprietor appealed against compulsory VAT registration, a best-of-judgment VAT assessment and a civil evasion penalty under section 60 of the Value Added Tax Act 1994. The VAT tribunal upheld the registration and confirmed reduced assessments and a reduced penalty. Hart J dismissed the taxpayer’s appeal.

The further appeal concerned the fairness of the Customs interview, the tribunal’s responsibility for allegedly inadequate representation, the allocation and standard of proof, and the rationality of the tribunal’s calculation. The central questions included whether Convention classification of the penalty proceedings as criminal engaged domestic criminal procedure, and who bore the burden of proving the amount of tax evaded.

1. Appeal dismissed. The Customs interview was conducted to determine whether a civil penalty should be imposed. Classification of the resulting proceedings as criminal for article 6 purposes did not make them criminal in domestic law or require a caution under Code C of the Police and Criminal Evidence Act 1984. Article 6 governs the fairness of the proceedings as a whole rather than imposing particular domestic rules of evidence or procedure. The evidence was not shown to have been obtained or used unfairly.

2. The tribunal did not breach article 6 by failing to intervene in the taxpayer’s representation. Representation by accountants was common in VAT proceedings and did not itself suggest incompetence. The conduct of a case ordinarily remains a matter between a party and the chosen representative. Intervention is required only where ineffective representation is manifest or sufficiently brought to the authority’s attention. The decision not to call the taxpayer could reasonably have appeared tactical, particularly because cross-examination exposed serious risks. It therefore did not make serious incompetence manifest.

3. On an appeal against a best-of-judgment assessment, the taxpayer bears the burden of establishing the correct amount of tax. The tribunal’s primary task is to find that amount, so far as possible, from the material properly available. The assessment remains prima facie correct until the taxpayer shows that it is wrong and identifies the correction required.

4. The ordinary rule for a statutory appeal against enforcement action is that the appellant must prove the grounds of appeal unless the statutory scheme provides otherwise. Section 60(7) of the Value Added Tax Act 1994 expressly places on Customs the burden of proving conduct intended to evade VAT and dishonesty. Proof of intentional evasion will ordinarily require Customs to establish the fact of evasion, including that the registration threshold was exceeded. The precise amount of tax, however, remains for the taxpayer to challenge and prove for both the assessment and penalty.

5. Dishonesty under the civil penalty regime is proved on the balance of probabilities. The seriousness and inherent improbability of an allegation affect the strength of evidence needed, but do not create a higher standard of proof. The tribunal’s unequivocal findings disclosed no error.

6. The tribunal’s rough-and-ready averaging exercise was not irrational. In the absence of adequate records or direct evidence from the taxpayer, it was entitled to make the best use of the limited material available.

1. Court of Appeal (Civil Division): The taxpayer’s appeal was dismissed unanimously: [2006] EWCA Civ 89.
2. High Court, Chancery Division: Hart J dismissed the taxpayer’s appeal from the VAT tribunal. No citation is stated.
3. VAT tribunal: The tribunal upheld compulsory registration and confirmed the VAT assessment and civil evasion penalty in reduced amounts.