UT/2022/000157 - [2024] UKUT 00346 (TCC)

We will deal first with the DLN issued to Mr Malde.

The DLN was issued by HMRC under section 61 VATA in relation to the civil evasion penalty imposed on SA as a result of SA’s dishonest failure to register for VAT. Under the DLN, HMRC seek to recover the whole of the penalty from Mr Malde “as if he were personally liable under section 60 VATA to a penalty” of that amount (section 61(3) VATA).

It is therefore Mr Malde who appeals against the imposition of the civil evasion penalty itself (the “basic penalty” as referred to in section 61(2) VATA). In relation to Mr Malde’s appeal against the basic penalty, the same rules apply to Mr Malde’s appeal as would have applied to an appeal by SA. Accordingly, as in Khan, section 60(7) VATA applies to impose the burden of proof on HMRC in relation to the questions of whether SA has for the purposes of evading VAT taken any action or omitted to take any action and whether that conduct involves dishonesty. In proving the intention to evade, HMRC must also prove the fact of evasion (Khan [73]). In Khan, Carnwath LJ took the view that “in most cases, proof of intention to evade is likely to depend partly on proof of the fact of evasion” (Khan [73]). The effect was that, in a case involving a penalty for failure to register for VAT, the burden was on HMRC to show that the VAT threshold had been exceeded. We take a similar approach in this case.

In the present case, the issue of whether the threshold has been exceeded necessarily involves not only the question of whether the level of supplies that were made by SA exceeded the threshold, but also the question of whether those supplies were made in the UK. Following the guidance set out by Carnwath LJ in Khan, both of these issues fall to HMRC to prove in order to establish liability to the basic penalty. That conclusion is also consistent with the authorities suggesting that the general rule in penalty appeals is that the burden is on HMRC to prove all aspects relating to the imposition of the penalty (King v Walden, PML).

The exception, to which Carnwath LJ referred in Khan, relates to the burden of proof in relation to the quantum of the underlying tax liability by reference to which the penalty is calculated. In Khan, Carnwath LJ expressed the view that the burden remains on the taxpayer in relation to the quantum of the underlying tax liability. This was on the basis that the implication of the drafting of section 60(7) VATA was that issues other than those identified in the section as falling to HMRC to prove must fall to the taxpayer (Khan [74(ii)]). Any concerns about the implications of Article 6(2) ECHR were, in Carnwath LJ’s view, adequately addressed by the imposition of the burden on HMRC in relation to the issues identified in section 60(7) (Khan [74(iii)]). In accordance with that guidance, Mr Webster KC conceded in his submissions to this tribunal that the burden fell on the taxpayer in relation to issues as to the quantum of the underlying liability. That view was also consistent with the FTT’s treatment of the issues in this case. We would follow the same approach.

In addition, to the appeal against “the basic penalty”, although Mr Malde is not entitled to appeal against the issue of the DLN itself, he is, in accordance with section 61(5)(b) VATA entitled to appeal against both HMRC’s decision that the conduct of SA giving rise to the penalty (i.e. the failure to register) was attributable to his dishonesty, and against HMRC’s decision to recover 100% of the civil evasion penalty from him rather than the company. In relation to the burden of proof on these issues, we can derive no guidance from Khan as it did not involve a DLN. However, in our view, the burden must fall on HMRC. This is a penalty appeal and so Article 6(2) ECHR would ordinarily dictate that the burden of proof should fall on HMRC (as outlined in King v Walden and PML) in the absence of factors which justify a departure from the presumption of innocence in Article 6(2) ECHR. There are no such factors in this case. Furthermore, the former issue involves an assertion by HMRC of dishonesty on the part of Mr Malde, which in accordance with general principle, HMRC must plead and prove.

It follows that we find no error in the FTT’s approach in relation to the DLN. All the issues before the FTT were for HMRC to prove apart from the quantum of the underlying liability on which the penalty was based.