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

On an appeal against a penalty assessment, it is well-established that the general rule is that the burden is on HMRC to prove all aspects giving rise to the penalty (see, for example, R (PML Accounting Ltd) v HMRC [2018] EWCA Civ 2231 (“PML”) [101]).

The underlying rationale for this presumption is commonly stated to be that appeals against penalty assessments are “criminal” proceedings for the purposes of Article 6 ECHR (King v Walden [2001] STC 822 at [71], Customs & Excise Commissioners v Han [2001] EWCA Civ 1040). If so, Article 6(2) ECHR requires that a defendant be presumed innocent until proven guilty. It follows that the burden falls on HMRC to prove that the conditions for a penalty to be issued are met.

In his submissions to this tribunal, Mr Webster KC acknowledged that the right of a defendant under Article 6(2) ECHR is a “qualified right”. Article 6(2) does not prohibit the creation of presumptions of fact or law (Salabiaku v France (1988) 13 EHRR 379, Sheldrake v DPP [2004] UKHL 43 (“Sheldrake”)). However, exceptions to the presumption of innocence have to be confined within reasonable limits and should not be arbitrary. In appropriate cases, therefore, it may be possible to justify an exception to the general principle to the extent that it is a justifiable and proportionate response to a legitimate issue. The justifiability of any exception requires “an examination of all the facts and circumstances of the particular provision and the particular case” (Sheldrake [21] per Lord Bingham).

In this respect, Mr Webster KC referred to the decision of the Court of Appeal in Euro Wines. That case concerned the imposition of a penalty on a person holding excise goods under paragraph 4 Schedule 41 FA 2008. The taxpayer appealed against the decision of the Upper Tribunal that the provisions of section 154 CEMA 1979 – which imposed the burden of proof on the taxpayer to show that duty had been paid on excise goods – was incompatible with Article 6(2) ECHR. The Court of Appeal dismissed the appeal finding that, in the circumstances, it was reasonable and proportionate to impose the reverse burden of proof on traders in excise goods. In reaching this conclusion, David Richards LJ, giving the judgment of the court, took into account the following factors (i) that the penalty was of a regulatory nature and its imposition was not dependent on the proof of fault on the part of the trader (Euro Wines [34]); (ii) that the penalty was being imposed on a trader in excise goods, who would be aware of the risks of holding goods in respect of which duty had not been paid (Euro Wines [35]); and (iii) that it remained open to the trader to disprove the presumption or to show that the trader had a reasonable excuse for the default (Euro Wines [38]). In those circumstances, David Richards LJ considered that the reverse burden of proof was justified “in circumstances where the evasion of duty was a longstanding problem with serious consequences for the public finances” (Euro Wines [42]). Mr Webster KC says that there is no such justification in the present case for a departure from the general rule.

As we have mentioned, Mr Hayhurst, for HMRC, argued before the Tribunal that even on an appeal against the penalty assessment, the general rule was that the burden of proof fell on the taxpayer except where statute expressly or impliedly provided otherwise or one of the well-established exceptions (such as in cases involving the application of the Kittel principle) applied. He made this argument by reference to the series of cases to which we have just referred (namely Brady, Khan, Ingenious, and Awards).

We do not accept this submission. As an initial point, we do not accept that this line of cases is authority for the position that Mr Hayhurst advances. This is particularly the case in relation to the decisions in Brady, Ingenious and Awards. These cases are not penalty cases. As we have discussed, they establish that, in a tax appeal the burden is on the taxpayer even in cases which involve allegations of fraud or dishonesty subject to the well-established exceptions to which we have referred. They do not justify a departure from the general rule – based on Article 6(2) ECHR – that, in penalty proceedings, the onus is on HMRC to prove all aspects of the case required to impose the penalty subject to any exceptions expressly or impliedly required by that statute.

The only penalty case in the line of cases to which Mr Hayhurst refers is Khan. That case involved appeals by the taxpayer, Mr Khan, against a decision of the Commissioners for HM Customs & Excise that his taxable supplies had been above the VAT threshold, with the consequence that he should have been registered for VAT, against a “best judgment” assessment to VAT under section 73 VATA, and against a civil penalty under section 60 VATA.

The appeals raised various issues: unfairness at interview; breach of Article 6 ECHR at the hearing of the appeals before the tribunal; the burden and standard of proof; and irrationality. So far as the burden of proof was concerned, the Commissioners had not disputed that the burden was on them to prove that Mr Khan had acted or omitted to act for the purposes of evading VAT, and that his conduct involved dishonesty. Mr Khan’s argument was that the burden was also on the Commissioners to show that the VAT threshold had been exceeded and, for the purposes of the penalty calculation, that the “best judgment” assessment (by reference to which the penalty was calculated) was correct. The Commissioners conceded that the burden of proof lay on them not only to show that Mr Khan’s supplies had exceeded the VAT registration threshold, but also to establish the quantum of tax evaded. Their contention was that they had discharged these burdens.

In the Court of Appeal, Carnwath LJ was not content with the analysis of the parties in relation to the burden of proof. As he explained, at Khan [68]:

Carnwath LJ then supplied his own analysis, beginning with the appeal against the underlying assessment to VAT (at Khan [69] to which we refer at [78] above). He then went on to consider the question of burden of proof more generally, at Khan [70]:

After citing two planning cases in support of this proposition, Carnwath LJ set out his analysis of where the burden of proof lay in relation Mr Khan’s appeals, including the appeal against the civil evasion penalty. The relevant part of the judgment is found at Khan [73]-[74]:

There is an argument that this guidance from Carnwath LJ in Khan is strictly obiter given that the Court of Appeal was able to reach its decision on the basis of the agreed position of the parties (to which Carnwath LJ refers at Khan [69]). However, the judgment is referred to with approval by Henderson LJ in Awards (Awards [37]). Although it is not strictly binding upon us, we take due regard of the analysis set out in this judgment as being at least helpful guidance and guidance which we should follow (particularly in relation to the burden of proof in the context of civil evasion penalties under section 60 VATA).

We note, in particular, the following points from Carnwath LJ’s judgment.

As a general point, Carnwath LJ’s analysis suggests that the burden is on the taxpayer in both tax appeals and penalty appeals except where the statute expressly or impliedly dictates otherwise (Khan [73]). In this respect, the comments of Carnwath LJ lend some support to the principle for which Mr Hayhurst, on behalf of HMRC, argued before this tribunal.

These comments have to be read in their context, namely that of an appeal against a civil evasion penalty under section 60 VATA. In such a case, the statute is clear that the burden falls on HMRC in relation to the intention to evade VAT and dishonesty (see section 60(7) VATA). The clear implication was that the burden of proof on other matters fell on the taxpayer. This point is acknowledged by Carnwath LJ in his judgment (Khan [73], [74(ii)]). Those other matters included the quantum of the underlying liability where the burden of proof fell on the taxpayer “for all purposes” i.e. including for the purposes of the civil evasion penalty (Khan [73]);

Even so, as Carnwath LJ acknowledges (Khan [73]), in proving an intention to evade VAT for the purposes of section 60 VATA, HMRC must necessarily also prove “the fact of evasion”. For that reason, the burden was on HMRC to establish that the VAT threshold had been exceeded and, by implication, also that the taxpayer had made sufficient taxable supplies in order to exceed the relevant threshold.

In relation to the question of the burden of proof in relation to the amount of the underlying tax liability on which the penalty was based, the burden remained on the taxpayer. In this context:

Carnwath LJ considered that any concerns about the application of Article 6 ECHR in this context were adequately addressed by the fact that section 60(7) VATA placed the burden on HMRC in relation to the issues of dishonesty and evasion (Khan [74(iii)]);

Carnwath LJ directly addressed the question of the burden of proof in penalty cases where there had been no appeal against the underlying assessment – which was not the case in Khan itself (see Khan [74(v)]). In his view the amount of the liability assessment in such cases became an amount of VAT due (by virtue of section 73(9) VATA) and in the separate penalty proceedings there was no scope to reopen the underlying assessment;

finally, Carnwath LJ notes that there are policy reasons for the burden of proof being imposed on the taxpayer in relation to questions of the underlying liability. The alternative – that the burden was on HMRC – would favour non-compliant and uncooperative taxpayers (Khan [74(vi)]).

As we have mentioned above, this passage provides some support for the proposition that Mr Hayhurst advances. However, the judgment has to be set in its context. Furthermore, as the Carnwath LJ’s analysis acknowledges, any decision on where the burden of proof lies has to pay due regard to and be compatible with the presumption of innocence in Article 6(2) ECHR. The reason that Carnwath LJ was able to come to the view that the onus was on the taxpayer in relation to the quantum of the tax liability was that the statute provided clear guidance as to where the burden should fall, and he was satisfied that the requirements of Article 6(2) were met at least in part by the allocation of the burden in relation to issues of evasion and dishonesty to HMRC.

In the usual case, an appeal against the imposition of the penalty will take place against the background of an appeal against the tax liability to which it relates. The assessment of that liability will either have been finalised or will be determined as part of the same proceedings. The statements made regarding the burden of proof in many cases concerning penalty assessments will therefore often assume that questions relating to the substantive liability have been settled. Such statements can properly be regarded as limited to the conditions that have to be fulfilled for the imposition of the penalty (for example, the conduct of the taxpayer and whether that conduct has brought about a loss of tax).

That having been said, the case law is clear that it is open to a taxpayer when disputing a penalty assessment to challenge the underlying tax liability itself (see, for example, Bell v HMRC [2018] UKFTT 0225 (TC) [159]-[160]). If a taxpayer seeks to do so, issues of issue estoppel (rare in tax cases) and/or abuse of law may arise (see HMRC v Kishore [2021] EWCA Civ 1565)). However, HMRC have not sought to argue that estoppel or abuse of law issues arise in these appeals.

In a case where a taxpayer does challenge a penalty assessment on the grounds that the underlying tax assessment is wrong and an estoppel or abuse of law issue does not arise, there is a potential conflict between the two general rules to which we have referred governing the burden of proof in tax appeals and the burden of proof in penalty appeals. This is particularly acute where the underlying assessment has not been the subject of litigation.

Of the cases to which we have been referred, there is only one case outside the First-tier Tribunal that directly addresses this issue. That is the Upper Tribunal decision in Zaman v HMRC [2022] UKUT 252 (TCC) (“Zaman”). In that case, the taxpayer, Mr Zaman, appealed against a PLN which had been issued to him following a VAT assessment on a company, Zamco Limited, of which he was the sole director. Zamco did not appeal the assessment.

The FTT allowed Mr Zaman’s appeal on the grounds that HMRC had not shown, on the balance of probabilities, that the relevant goods (alcoholic drinks) had been supplied in the UK. On appeal to the Upper Tribunal, HMRC argued that the FTT erred by failing to apply a shift in the “evidential onus of proof” in circumstances where Mr Zaman asserted before the FTT that there were no “vatable supplies”. At that point, HMRC argued, Mr Zaman assumed the evidential burden of displacing the assessment, and, if he failed to discharge that burden, the penalty should stand (Zaman [22]). The Upper Tribunal allowed HMRC’s appeal. The Upper Tribunal said this at Zaman [34]:

The Upper Tribunal’s decision in Zaman therefore suggests that if a challenge to a penalty assessment is made solely on the basis that the underlying assessment to tax is wrong, the burden remains on the taxpayer to show that the assessment was wrong. The burden does not fall on HMRC simply because the matter is being determined as part of an appeal against the penalty. The burden only falls on HMRC in respect of the additional requirements that are required to be fulfilled in order to impose a penalty.

The Upper Tribunal is very clear in its decision in Zaman. However, we do have some reservations about it. In particular, there is no reference in the decision to the potential application of Article 6(2) ECHR. Nor is there reference to the leading cases on the burden of proof in the case of penalty assessments (such as King v Walden, Khan and Euro Wines). This is so notwithstanding that the practical effect of the decision of the Upper Tribunal in Zaman appears inconsistent with the guidance of Carnwath LJ in Khan (albeit in a different statutory context) in that Carnwath LJ accepted that some essential elements of the underlying tax liability (i.e. whether the threshold was exceeded) were part of the issue of evasion and for HMRC to prove.

Having reviewed the authorities, in our view, the key cases (principally King v Walden and Euro Wines) are clear that the question of the scope of the burden of proof in penalty appeals must be determined by reference to the application of the presumption of innocence in Article 6(2) ECHR. On that basis, the burden must fall on HMRC in penalty appeals unless an exception to the presumption can be justified. Whether or not an exception can be justified will depend upon all the facts and circumstances of the case. A penalty appeal in which a penalty is challenged on the basis that the underlying assessment is wrong – once questions of estoppel or abuse of process have been addressed – remains a penalty appeal. As such, and as a general rule, the principle that the burden is upon HMRC in penalty appeals includes a penalty appeal of this kind; that is to say a penalty appeal where the challenge is made on the basis that the underlying assessment is wrong.

As we have mentioned above, it is arguable that Carnwath LJ’s comments regarding the burden of proof in his judgment in Khan are strictly obiter. However, they are approved by Henderson LJ in Awards (Awards [37]). In any event, we do not regard our conclusion as inconsistent with Carnwath LJ’s judgment in Khan. In our view, his judgment falls within the exception. The relevant statute in Khan – section 60(7) VATA – defined the matters that were for HMRC to prove on any appeal. The clear implication was that the burden fell upon the taxpayer in relation to other matters. Carnwath LJ considered the implications of Article 6(2) ECHR and decided that they were adequately addressed.

As regards the decision of the Upper Tribunal in Zaman, which falls within the same statutory context as the appeals against the PLNs in this case, for the reasons that we have given, in our view the decision may be regarded as per incuriam given that there is no reference in the decision to the leading cases on penalty appeals or to Article 6(2) ECHR. In any event, we respectfully disagree with the conclusion in that case. We acknowledge that, although a decision of the Upper Tribunal is not binding on a later Upper Tribunal, as a tribunal of coordinate jurisdiction we should normally follow the decision of the earlier tribunal unless we are satisfied that the earlier decision is wrong (see Gilchrist v HMRC [2014] UKUT 169 (TCC) at [94]). However, on this issue, we are satisfied that the decision in Zaman is wrong, and so we will not follow it.

We turn now to the application of those principles to the facts of this case.