Clients who are under investigation by HMRC sometimes complain that they are made to feel like criminals. OK, as a matter of fact some of them may be: but the conventions of client management tend to suggest that it’s not always wise to say so, particularly since the vast majority of tax misbehaviour is settled under the civil code even where strictly speaking there may be some case for saying that a criminal offence has been committed.
One of the many areas where the difference between the criminal and the civil code matters, is in regard to the standard of proof. In a civil matter the question is generally where does the balance of probabilities lie? If a contentious case is to be taken before Commissioners the client must understand that the appeal body will decide any matter of fact (Were sales understated? Was some particular unvouched expense actually incurred? What were the owner’s living expenses?) simply on the basis of which explanation of the facts is considered more likely to be true. That explanation may be the one put forward by HMRC: it may be the one put forward by the client: or it may be one that is different from both of these.
By contrast, in a criminal matter, the higher standard of “beyond reasonable doubt” applies.
This is important when fines and penalties come to be imposed. If the penalty has the flavour of a criminal sanction, the criminal standard of proof applies. If on the other hand it is more akin to a civil matter, the civil standard of proof applies. So the crucial test is – when does a penalty become a criminal sanction?
This is ultimately a question for the courts. And in a recent case (HMRC v Khawaja) the courts have held that the penalty under s95(1) for the negligent delivery of an incorrect personal tax return – the main penalty provision underpinning tax investigations – is indeed a civil matter as HMRC contended. HMRC needed to show only that it was more likely than not that an incorrect return had been negligently submitted: and that in applying the criminal standard of proof the General Commissioners had misled themselves.
This article was later published by TaxationWeb.