Revenue and Customs v Khawaja

Income tax penalty proceedings under the Taxes Management Act 1970 are civil proceedings. The applicable standard of proof is therefore the balance of probabilities, notwithstanding the use of the word penalty or the potentially deterrent and punitive consequences. The criminal standard applies only where the nature of the particular proceedings makes that appropriate. Classification as criminal proceedings for Article 6 purposes does not automatically alter the domestic standard of proof. A tribunal that applies the criminal standard commits an error of law, and the affected issue should ordinarily be remitted for reconsideration using the correct standard.

HMRC appealed by way of Case Stated from the General Commissioners’ decision on penalties imposed on Tahir Iqbal Khawaja under section 95(1)(a) of the Taxes Management Act 1970. The penalties concerned allegedly negligent understatement of remuneration, benefits in kind and property income in tax returns for 1993/94 to 1998/99.

The Commissioners applied the criminal standard of proof. They found negligence proved in relation to property income and benefits in kind, but not in relation to remuneration. HMRC challenged the standard of proof. The respondent relied on the quasi-criminal character of the proceedings and Article 6. The central issue was whether the criminal or civil standard applied.

1. Standard of proof. The appeal was allowed. Proceedings concerning penalties under section 95 of the Taxes Management Act 1970 are civil proceedings. The fact that the sanction is called a penalty, or that it may deter or punish, does not itself require the criminal standard.
2. The civil standard is the starting point. The statutory scheme, the reasoning underlying the Keith Report, and the authorities concerning VAT penalties supported applying the balance of probabilities to income tax penalty proceedings. That conclusion applied a fortiori to allegations of negligence. The doubts expressed in Inland Revenue v Ruffle about the criminal standard were shared. The statement in that case was unnecessary to the result and therefore did not determine this appeal.
3. The classification of penalty proceedings as criminal for Article 6 purposes provides Convention safeguards but does not make the proceedings criminal for all domestic purposes. It does not automatically introduce the criminal standard of proof.
4. The Commissioners had applied the wrong standard. The issue which they had found unproved to the criminal standard was remitted for rehearing on the balance of probabilities. No rehearing was required of the issue already found proved.
5. The respondent’s cross-appeal, if properly brought, was dismissed. The Case Stated did not explain the Commissioners’ calculation of the individual penalties sufficiently to permit effective appellate review.

The judgment describes the appeal as an appeal by way of Case Stated from the General Commissioners’ decision dated 30 November 2005. The earlier assessment appeal had been partly allowed by Lawrence Collins J, but that judgment is part of the same litigation and is not separately modelled.