Hackett – Tribunal considers whether HMRC's decision to proceed by way of civil penalty rather than criminal prosecution was an abuse of process
In Lindsay Hackett v HMRC  UKUT 212 (TCC), the Upper Tribunal (UT) has confirmed that the decision whether to bring civil or criminal proceedings is a matter for HMRC to decide with any such decision being amenable to challenge by way of judicial review.
HMRC has the power to impose civil penalties for deliberate or careless VAT errors under Schedule 24, Finance Act 2007. Under paragraph 19, Schedule 24, where the penalty is payable by a company for a deliberate error which was attributable to an officer of that company, HMRC can issue a personal liability notice (PLN) requiring that officer to pay some or all of the penalty. In cases of suspected tax fraud, HMRC can also commence a criminal investigation.
HMRC assessed a £12.8m penalty against Intekx Ltd (IL) for deliberate, and some concealed, inaccuracies contained in its VAT returns from 2009 to 2013. Mr Hackett was the sole director of IL at the relevant time and HMRC issued a PLN to Mr Hackett for this sum. The essence of HMRC’s case was that Mr Hackett knew that certain transactions carried out by IL were connected with the fraudulent evasion of VAT.
Mr Hackett’s underlying ongoing appeal to the First-tier Tribunal (FTT) concerns HMRC’s contention that he is liable to pay the full amount of the penalties as assessed against IL and HMRC's decision to issue to him a PLN.
The present appeal to the UT was in relation to case management decisions made by the FTT in 2016. Mr Hackett had applied to FTT for a stay of proceedings on the grounds that, given the serious nature of the allegations made against him, HMRC should have instituted criminal proceedings against him because the burden of proof on HMRC in such proceedings would have been higher (ie the criminal burden of beyond reasonable doubt rather than the civil burden of the balance of probabilities). Mr Hackett argued that HMRC’s decision to proceed by way of PLN was an abuse of process because it amounted to prosecuting a serious allegation of fraud before the FTT, thereby depriving him of fundamental constitutional and statutory rights, in particular, the right to trial by jury and the protection against self-incrimination.
The FTT dismissed Mr Hackett's application and he appealed to the UT.
The appeal was dismissed.
The UT considered whether:
- it was an abuse of process for HMRC to proceed against Mr Hackett by means of a PLN rather than prosecuting him before a criminal court; and
- the appropriate standard of proof in Mr Hackett’s appeal against the PLN was the civil or criminal standard.
The UT reviewed the relevant case law relating to the FTT’s jurisdiction to stay proceedings for an alleged abuse of process. The UT concluded that the alleged abuse of process was outside the FTT's jurisdiction because it was not related to the fairness of the proceedings themselves. It would therefore be inappropriate for the FTT to exercise its case management powers to stay proceedings on the basis that HMRC's decision to proceed with a civil penalty was unreasonable and that doing so would be tantamount to the assumption of a power of judicial review which the FTT did not have.
With regard to the second issue, the UT considered Khawaja v HMRC  STC 150, in which the UT had confirmed that in the context of an appeal against a penalty issued under section 95(1), Taxes Management Act 1970 (TMA), the standard of proof was the civil standard of the balance of probabilities. In the view of the UT, the instant case could not be distinguished from Khawaja and it agreed with the FTT and confirmed that the standard of proof to be applied was the civil standard.
Mr Hackett’s appeal was therefore dismissed and the case was remitted to the FTT to determine Mr Hackett's substantive appeal.
This was an unusual case, in that taxpayers normally argue that HMRC should proceed via the civil, rather than criminal, route.
With regard to the FTT’s jurisdiction, a taxpayer who wishes to argue abuse of process by HMRC will have to do so by way of judicial review proceedings in the Administrative Court rather than on appeal to the FTT. This case is yet another example of how important choice of forum can be. In circumstances where there is some doubt as to the correct forum, given the relatively short time limit applicable to judicial review applications, consideration should be given to making a 'protective' application for judicial review which can then be stayed pending the outcome of any appeal before the FTT.
In any event, as it had been open to Parliament to prescribe the circumstances in which civil penalty proceedings are inappropriate, for example, in cases of suspected fraud, but it had chosen not to do so, it may be difficult to persuade the courts that a decision by HMRC to proceed down the civil penalty route rather than the criminal route, constitutes an abuse of process.
Any taxpayers who face an allegation from HMRC that they have acted deliberately or dishonestly should seek expert legal advice before responding to any such allegation.
The decision can be viewed here.