In short

Customs challenged a VAT tribunal decision that Mr Han was entitled to deduct input tax on his own services as a sole practitioner.

The dispute turned on whether a taxable person can deduct VAT on services supplied to himself.

The Court of Appeal dismissed the appeal by majority, though Nourse LJ would have allowed it.

Decision

Customs appeal dismissed. [90]

Issue

Can a sole practitioner deduct input tax on services he supplies to himself?
Yes. A taxable person acting in an economic activity can deduct input tax even on self-supplied services. [90]

Reasoning

The majority held the input tax deduction was available for self-supplied professional services. [85]

Written by AI from the judgment on 22 August 2026. Each ¶ links to the paragraph it came from. Read those before relying on it.

▶Statutes Cited26

▶Case Law Cited8

▶Cited By68

HAN & YAU MARTINS & MARTINS MORRIS - and - COMMISSIONERS OF CUSTOMS AND EXCISE [2001] EWCA Civ 1048

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM VAT AND DUTIES TRIBUNAL

(President: Stephen Oliver QC)

[2001] EWCA Civ 1048

Case No Case No: A3/2001/0149A A3/2001/0149

Venue Royal Courts of Justice, Strand, London, WC2A 2LL, Tuesday 3rd July 2001

Between

HAN & YAU MARTINS & MARTINS MORRIS - and - COMMISSIONERS OF CUSTOMS AND EXCISERespondents Appellant

Before

Lord Justice Potter

Lord Justice Mance

Sir Martin Nourse

Kenneth Parker QC and Timothy Ward Esq. (instructed by the Solicitor, Customs and Excise for the appellant)

Eleanor Sharpston QC and Andrew Young Esq. (instructed by Penningtons for the respondent)

Date 3 July 2001

LORD JUSTICE POTTER:

[1]INTRODUCTION: This is an appeal by the Commissioners of Customs and Excise against a decision of the Chairman of the VAT and Duties Tribunal (Stephen Oliver QC) ("the Chairman") made upon a preliminary issue, released on 19 December 2000 and certified by the Tribunal pursuant to CPR Part 52 PD 21.6 on 20 December 2000. The decision is reported at [2000] V & DR 312. Leave to appeal directly to this court was granted by Aldous L.J. on 9 March 2001.

[2]The decision relates to a preliminary issue raised in three appeals before the Tribunal, each of which raised a fundamental issue of law concerning the applicability of the European Convention of Human Rights ("the ECHR") to VAT and Excise procedures, namely whether or not the imposition by the Commissioners of Customs and Excise ("the Commissioners") of (ostensibly civil) penalties for alleged dishonest evasion of tax pursuant to S.60(1) of the Value Added Tax Act 1994 ("VATA") and s.8(1) of the Finance Act 1994 ("FA94") gave rise to criminal charges within the meaning of

Article 6(1) of the ECHR

, as each of the taxpayers contended.

[3]The Chairman determined the issue in favour of the taxpayers, who are the respondents in this appeal. The Commissioners seek an order setting aside that determination and substituting the determination by this court that the imposition of the penalties did not give rise to criminal charges within the meaning of Article 6.

[4]The importance of the question lies in the consequences which flow from the decision of the Tribunal in terms of the protection afforded to taxpayers by the 'fair trial' provisions of Article 6. Where what is at issue is the "determination….of a criminal charge" (see Article 6(1)), various "minimum rights" are provided for by Article 6(2) and Article 6(3) which are particularly pertinent in cases such as the present, where penalties have been raised against non-English speakers such as Mr Yau, or inadequate English speakers such as Mr Martins, and there are also alleged to be doubts in respect of the observation of the procedural safeguards which it is contended should have been available to all three respondents. THE FACTUAL BACKGROUND

[5]The Tribunal made no findings of fact. However, the following matters are not in dispute. Mr Han and Mr Yau

[6]At the material time, these respondents carried on business at the Murdishaw Supper Bar in Runcorn, Cheshire, selling fish and chips and Chinese meals for consumption off the premises. Following inspection of their business records and interviews, the Commissioners concluded that they had under-declared the VAT due and, on 25 February 1997, the Commissioners issued a notice of assessment of unpaid tax in the sum of £80,767 plus interest covering the period 25 February 1991 to 31 July 1995 pursuant to S.73(1) VATA. On 12 February 1998, that assessment was reduced to a sum of £76,455.12 plus interest, following representations by the respondents' accountants. On 26 March 1998 the Commissioners assessed the respondents to a penalty pursuant to S.60(1) VATA in the sum of £67,095, which represented 90% of the assessed sum. The 10% reduction was stated to be made for the respondents' "partial assistance".

[7]Before the Tribunal Mr Han and Mr Yau challenge the "Statement of Case" drafted by the Commissioners' solicitors and they deny that they have been dishonest. They challenge the assessment of tax upon which the penalty is based. They do not accept that the interviews which took place were fair, contending in particular that the Customs Officers who carried out the interview demonstrated that they were fully aware of Mr Yau's linguistic limitations by requiring his wife to act as an interpreter. They contend that if (which is denied) there was any liability to a penalty, they were not afforded any adequate inducement or opportunity to co-operate with a view to mitigation of the penalty. Insofar as the Customs Officers purport to rely on any answers allegedly given in interview, these will be challenged. Martins & Martins

[8]These respondents carry on a business comprising two fish and chip shops in Wantage, Oxfordshire. Following inspection of their business records and interviews, the Commissioners concluded that they had under-declared output VAT. The Commissioners originally assessed the respondents pursuant to S.73(1) VATA, in the sum of £86,202 plus interest in respect of unpaid tax. That assessment was challenged and proceedings in that respect came on before the Tribunal on 6 October 1999 at a stage when there was no question of imposition of a penalty. However, before the Tribunal, Mr Martins gave evidence that he had suppressed VAT, explaining that he was under financial pressure because his mother was dangerously ill and he needed to send money for her welfare in Portugal. He confessed to dishonesty, accepted the customs officers were right to raise an assessment, but disputed the quantum of the assessment which they had raised. Mr Martins speaks some English, in which language the proceedings were conducted, there being no provision for an interpreter at the Tribunal. Having observed Mr Martins giving evidence, the tribunal directed that the hearing be adjourned. An officer of the Commissioners who had heard Mr Martins' admission in the witness box then sought to interview him for the purposes of issuing the penalty. Mr Martins had not been released by the Tribunal as a witness in the tax assessment appeal and the officer who wished to interview him was a witness for the Commissioners in those proceedings. In those circumstances, the respondents were advised that it would be inappropriate for Mr Martins to agree to such an interview by that officer.

[9]By letter dated 19 January 2000 the Commissioners stated that it might be necessary in the circumstances to issue a penalty without mitigation. On 11 April 2000, the Commissioners duly issued a penalty set at 90% of the quantum of tax which the Commissioners estimated to be due. The tax due is denied by Mr and Mrs Martins and has yet to be determined by the Tribunal in the tax assessment appeal. The respondents contend that there was no need for urgency in the determination and notification of the penalty which justified the commissioners acting as they did. Mr and Mrs Martins brought a separate appeal in respect of that penalty and it is in that appeal (rather than the tax assessment appeal which was adjourned), that the Tribunal made the ruling which has given rise to the present appeal. Morris

[10]This respondent carries on business as an off-course bookmaker and is registered for the purposes of general betting duty. He is required by the Betting and Gaming Duty Act 1981 to account for general betting duty to the Commissioners. The respondent's premises were visited by officers of the Commissioners and he was interviewed. It appeared to the officers that betting slips had been altered and, in consequence, betting duty had been understated on the respondent's returns. By a letter dated 12 November 1998, the Commissioners notified the respondent of an assessment of general betting duty in the sum of £15,304.97 in respect of the periods from 1 March 1996 to 30 April 1998. In the same letter, they notified the respondent of an assessment of penalty in the sum of £7,652 for dishonest evasion of excise duty pursuant to S.8(1) FA 94. That sum represented a reduction of 50% of the penalty calculated to be available to reflect disclosure and co-operation given by the respondent. The respondent appealed both the assessment to unpaid tax and the imposition of the penalty. A number of factual matters are in dispute before the Tribunal which go to the correctness of the procedure and the appropriateness of the penalty imposed. THE RELEVANT STATUTORY PROVISIONS

[11]S.73(1) VATA provides that:

"Where a person has failed to make any returns required under this Act….or to keep any documents and afford the facility necessary to verify such returns or where it appears to the Commissioners that such returns are complete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notified to him."

[12]S.60 VATA, is headed 'VAT evasion: conduct involving dishonesty'. It provides: "(1) In any case where –(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability), he shall be liable, subject to sub-section (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct. (2) The reference in subsection 1(a) above to evading VAT includes a reference to obtaining any of the following sums – (a) a refund any regulations made by virtue of section 13(5); (b) a VAT credit;

(d) a repayment under s.39 ……. (4) Statements made or documents produced by or on behalf of a person shall not be inadmissible in any such proceedings as are mentioned in sub-section (5) below by reason only that it has been drawn to his attention – (a) that, in relation to VAT, the Commissioners may assess an amount due by way of a civil penalty instead of instituting criminal proceedings and though no undertaking had been given as to whether the Commissioners will make such an assessment in the case of any person, it is their practice to be influenced by the fact that a person has made a full confession of any dishonest conduct to which he has been a party and has given full facilities for investigation and (b) that the Commissioners or, on appeal, a Tribunal has power under Section 70 to reduce a penalty under this section, and that he was or may have been induced thereby to make the statements or produce the documents. (5) The proceedings mentioned in sub-section (4) above are – (a) any criminal proceedings against the person concerned in respect of any offence in connection with or in relation to VAT, and (b) any proceedings against him for recovery of the sum due from him in connection with or in relation to VAT. …………. (7) On an appeal against an assessment for a penalty under this section, the burden of proof as to the matters specified in sub-section (1)(a) and (b) above shall lie upon the Commissioners." [The burden of proof is that appropriate to civil proceedings, namely proof on the balance of probabilities: see 1 st Indian Cavalry Club Limited and Choudhury –v- Customs and Excise Commissioners

[1998] STC 293

]

[13]S.70(1) VATA provides:

"Where a person is liable to a penalty under Section 60.., the Commissioners or, on appeal, a tribunal, may reduce the penalty to such amount (including nil) as they think proper."

[14]S.72 VATA creates criminal offences in respect of the evasion of VAT as follows; "(1) If any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person, he shall be liable –(a) on summary conviction, to a penalty of the statutory maximum or of three times the amount of the VAT, whichever is the greater, or to imprisonment for a term not exceeding 6 months or to both; or

(b) on conviction on indictment, to a penalty of any amount or to imprisonment for a term not exceeding 7 years or to both. ……………. (3) If any person- (a) with intent to deceive produces, furnishes or sends for the purposes of this act or otherwise makes use for those purposes of any document which is false in a material particular; or (b) in furnishing any information for the purposes of this Act makes any statement which he knows to be false in a material particular or recklessly makes a statement which is false in a material particular, he shall be liable- (i) on summary conviction, to a penalty of the statutory maximum … or to imprisonment for a term not exceeding 6 months or to both; or (ii) on conviction on indictment, to a penalty of any amount or to imprisonment for a term not exceeding 7 years or both.

[15]S.8 of FA94 sets out a similar statutory regime in respect of civil penalties for the evasion of excise duty as is imposed by s.60 VATA and provisions analogous to those set out in s.70(1) VATA also apply under FA 94. S.8(1) of FA 94 creates liability in identical terms to s.60(1) VATA; s.8(2) includes within that liability the obtaining of various repayments, reliefs etc; such differences of wording as exist are immaterial to this appeal.

[16]Appeal lies to the VAT & Duties Tribunal in respect of both the assessment of unpaid tax and the imposition of a civil evasion penalty. THE HUMAN RIGHTS ACT and

ARTICLE 6 of the ECHR

[17]

Article 6 of the ECHR

is a "Convention right" within the meaning of s.1 of the Human Rights Act 1998 ("HRA").

[18]S.2(1) of HRA provides:

"A court or tribunal determining a question which has arisen in connection with a Convention right must take into account any – (a) judgment, decision, declaration or advisory opinion of the European Court of Human Rights …. whenever made or given, so far as, in the opinion of the court or tribunal, it is relevant to the proceedings in which that question has arisen."

[19]S.3(1) of the HRA imposes the interpretative obligation that:

"So far as it possible to do so, primary legislation and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights."

[20]

Article 6(1) of the ECHR

provides, so far as relevant, that:

"1. In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law…"

[21]Thus, a finding that the imposition of a penalty gives rise to a criminal charge is the threshold condition for application of the substantive provisions of Article 6 to the civil penalty procedures under s.60 of VATA and s.8 of FA 94. If applicable, there are implicit in the fair trial provisions of Article 6(1) rights which include a right to silence and a privilege against self-incrimination.

[22]Article 6(2) enshrines the presumption of innocence in criminal matters as follows:

"2. Everyone charged with a criminal offence shall be presumed innocent until proven guilty according to law."

[23]Article 6(3) provides further "minimum rights" for those facing criminal charges:

"3. Everyone charged with a criminal offence has the following minimum rights: (a) to be informed promptly, in a language which he understands and in detail, of the nature and cause of the accusation against him; (b) to have adequate time and facilities for the preparation of his defence; (c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; (d) to examine or have examined witnesses against him and to obtain the attendance and examination of witnesses on his behalf under the same conditions as witnesses against him; (e) to have the free assistance of an interpreter if he cannot understand or speak the language used in court."

[24]Unlike certain other Convention rights, such as Article 8 (Right to Privacy) or Article 10 (Freedom of Expression), which are qualified rights admitting of derogation in particular cases or categories of cases, the fair trial guarantee contained in Article 6 does not admit of such derogation.

[25]Since s.2(1) of the HRA requires the court or tribunal to take into account the Strasbourg case law of the European Court of Human Rights ("Strasbourg") when determining a question which has arisen in connection with a Convention right, that case law provides the starting point for the domestic court or tribunal's deliberations and the court or tribunal has a duty to consider such case law for the purposes of making its adjudication. It is not bound to follow such case law (which itself has no doctrine of precedent) but, if study reveals some clear principle, test or autonomous meaning consistently applied by Strasbourg and applicable to a Convention question arising before the English courts, then the court should not depart from it without strong reason.

[26]It is not in dispute between the parties that the Strasbourg case law makes clear that the concept of a 'criminal charge' under Article 6 has an "autonomous" Convention meaning: Engel-v-Netherlands [1979-80] EHRR 647 para 81. There are effectively three criteria applied by the Strasbourg Court in order to determine whether a criminal charge has been imposed: see Engel and more recently AP, MP & TP v Switzerland

[1998] 26 EHRR 541

para 39. They are:(a) the classification of the proceedings in domestic law;

(b) the nature of the offence; and

(c) the nature and degree of severity of the penalty that the person concerned risked incurring. The Strasbourg Court does not in practice treat these three requirements as analytically distinct or as a "three stage test", but as factors together to be weighed in seeking to decide whether, taken cumulatively, the relevant measure should be treated as "criminal". When coming to such decision in the course of the court's 'autonomous' approach, factors (b) and (c) carry substantially greater weight than factor (a).

[27]In addressing this court, the submissions of the parties have been limited to the question of the importation of the principles of the Convention, and in particular the application of Article 6, through the medium of the HRA. However, it is right to record that Miss Sharpston has reserved her position to argue elsewhere that this is a case where the rights guaranteed by the Convention are required to be applied by direct application of Community Law. In this connection she points out that Article 22(8) of the Sixth VAT Directive (Council Directive 77/388/EEC: OJ 1977 L145, p.1) provides:

"Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States, by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers."

[28]She submits that, whilst the power of Member States under that directive is discretionary, the exercise of such powers (which in the UK is embodied inter alia in the provisions at issue in this case) is circumscribed by the general principles of Community Law.

[29]In this connection, Miss Sharpston relies upon the observation in International Handelsgesellschaft –v- Einfuhr und Vorratsstelle fur Getriede [1970] ECR 1125 at para 4 that:

"Respect for fundamental rights forms an integral part of the general principles of law protected by the Court of Justice. The protection of such rights, whilst inspired by the constitutional traditions common to the Member States, must be ensured within the framework of the structure and objectives of the Community."

[30]In this context, the general principles of Community Law include respect for the Convention and, in particular Article 6 rights: see Johnston –v Chief Constable of RUC [1986] ECR 1651 at para 18: and c.f. the observations of the European Court of Justice in Garage Molenheide BVBA –v- Belgium [1997] ECR 1-7281 at paras 46-49 in relation to the application of the principle of proportionality as a fundamental principle of Community Law to the national measures adopted by a Member State in the exercise of its powers relating to VAT.

[31]However, Miss Sharpston also recognises that in Marks & Spencer plc –v- Commissioners of Customs & Excise [2000] EuLR 293 , this court has made clear that, once a Member State has correctly implemented a Community Directive, an individual may not assert any right directly arising under it. Thus the question whether the penalties in issue are properly to be regarded as civil or criminal involves essentially the same question and process of interpretation of the VATA and FA 94 as arise under the HRA, namely whether the relevant provisions are open to interpretation in a manner which upholds Convention rights or whether the provisions of the legislation are so clearly incompatible with Convention Rights that it is not possible so to interpret them.

[32]The essence of the Commissioners' case on this appeal has been that, having regard to the three factors mentioned in paragraph 26 above, the Chairman ought to have concluded that the imposition of the penalties did not give rise to criminal charges and that, in failing to do so, he erred in law. The respondents contend that the Chairman properly recognised and correctly applied those criteria in coming to his decision, which they invite this court to endorse. THE DECISION BELOW

[33]The decision of the Chairman was set out at length and with great care. He first reviewed the civil and criminal penalty provisions under domestic law (see paragraph 11-15 above). He referred to their history and the fact that, until the introduction by the Finance Act 1985 of the civil penalty code which was the precursor of s.60 of the VATA, the VAT Offence code had provided solely for criminal offences, both in respect of regulatory matters and for fraud. The civil penalty code was introduced as a result of, and broadly for the reasons to be found in, the Report of the Committee on Enforcement of Powers of the Revenue Departments, 1983 ("The Keith Report"), from which the Chairman quoted. He then referred to the three Engel criteria (see paragraph 26 above) and proceeded to examine the civil penalties imposed under s.60 in the light of those criteria.

[34]Having done so he set out his conclusion, as follows: 35. "19. As I read the Ozturk decision, the proper approach is to regard none of the Engel criteria as determinative; instead, all the relevant factors are to be weighed and the decision reached accordingly. Features that together weigh most heavily on the criminal charge side are the punitive and deterrent characteristics of the section 60 and the section 8 penalties coupled with the amounts of those penalties. In this connection I have not found the possibility of mitigation as indicative one way or the other. It would be irrational if the non-co-operative taxpayer, for example, were to have Convention rights under Article 6.1 while the co-operative taxpayer, whose offence had been as serious but had earned mitigation, should be denied Convention rights. On that basis I think that the penalties are properly to be classed as "criminal charges" for the purpose of Article 6.1. Thus the Appellants have, on the reasoning in the cases taken into account so far, established that they have Convention rights entitling them to have the penalty assessment determined as criminal charges."

[35]The Chairman then went on to say that his conclusion was in line with a recent decision of the Strasbourg court in Georgiou –v- UK (Application No. 40042/98), reported at

[2001] STC 80

. In that case the court declined to admit to a full hearing an application based on alleged violation of Article 6, on the grounds that it was, on the merits, 'manifestly ill-founded'. However, the court stated in paragraph 1 of its decision:

"The criteria for establishing whether a 'criminal charge' has been determined are the domestic classification of the 'offence', the nature of the 'offence' and the nature and degree of severity of the potential and actual penalty …. The Court notes that the domestic proceedings in the present case were classified as civil rather than criminal, in domestic law. However, as in the Bendenoun –v- France (1994) 18 EHRR 54 at 74-76, paras 4A-4B, the penalty was intended as a punishment to deter re-offending, its purpose was both deterrent and punitive and the penalty itself substantial. These factors taken together indicate that the penalty imposed in the present case was a 'criminal charge' within the meaning of Article 6(1)"

[36]Those observations related to penalties imposed by the Customs and Excise under s.13 of the Finance Act 1994 , the predecessor of s.60 of VATA. Having cited them, the Chairman concluded:

"21. The Georgiou decision is directly on the point as regards the penalty provisions with which this appeal is concerned. I am not of course bound by it but I am nonetheless required by section 2 of the HRA to take it into account, which I have done. The penalties in question are 'criminal charges' within Article 6(1) ECHR; the implications of their being so will depend on the circumstances of the particular case."

THE KEITH REPORT

[37]As already mentioned, the genesis of the VAT civil penalty code is to be found in the 1983 Keith Report, to which both parties have referred us.

[38]At the time of the inquiry, the VAT offence code was set out in s.38 of the Finance Act 1972. It provided solely for criminal offences and no civil penalties were provided for fraud or negligent acts or omissions of a lesser kind. The offence code was intended to be comprehensive and covered both offences of fraudulent or reckless actions in relation to payment of VAT and for offences of strict liability in relation to matters of regulation, such as the keeping and producing of records, the furnishing of VAT returns and the payment of outstanding tax ("regulatory matters"). The code also included the power to compound the criminal proceedings i.e. to settle such proceedings out of court on such terms as Customs and Excise thought fit, usually the payment of a sum in respect of the arrears of tax plus an amount intended to penalise the taxpayer. Where proceedings were not compounded, they proceeded before the criminal courts, either summarily or on indictment, the imposition of penalties on conviction (within statutory maxima) being a matter for those courts.

[39]The Keith Report noted this position. Such arrangements were contrasted with those available to the Inland Revenue in respect of tax, where civil penalties were provided, both for regulatory matters and a wide range of offences such as neglect and fraud, on proof to the civil standard. Criminal proceedings under the 'mainstream' criminal law were taken only in respect of 'heinous' cases of fraud. The report recorded that the general thrust of the representations to it was that it was strongly desirable that there should be harmonisation of offence arrangements for VAT and direct taxes, most witnesses taking the Inland Revenue's scheme, with or without amendment, as their favoured model (paragraphs18.2.1 and

18.2.2 ). Paragraph 18.3.3 of the Report recorded that:

"The Department told us that, given acceptance of the need for a regulatory sanction, they would certainly envisage a system of civil sanctions, operating in much the same way as that of the Inland Revenue, with the civil penalties structured as were the existing criminal ones, and with Departmental internal procedures for selection of cases unchanged."

[40]In dealing with the suggestion of the introduction of a single penalty code, the report recorded as follows:

"18.3.7. Turning to the question of the introduction of penalties for civil fraud, to run in parallel with the bringing and compounding of criminal proceedings, Customs and Excise told us that to run the two systems together would undoubtedly give much greater flexibility in dealing with fraud or near fraud. It would afford welcome assistance in dealing with those cases where there were indications of fraud but where it was not possible to obtain proof to the criminal standard. At present those cases finished as simple unpenalised assessments and represented a loss to the Exchequer in delayed receipt of tax and cost of investigation. The proposal would therefore help the Department to deploy their resources effectively in the light of changing circumstances. It might well be that, in time, the need to compound criminal proceedings would be reduced, though Customs and Excise did not think that the need would wither away entirely."

[41]Because the system of civil penalties would depend on encouraging the co-operation of the taxpayer, the Department expressed the view that it would be necessary to make provision along the lines of s.105 of the Taxes Management Act 1970 so as to secure the admissibility of any evidence induced by such encouragement in the situation where an investigation started as a civil enquiry but turned into a serious case requiring criminal treatment (see paragraph 18.3.12). This reservation is now reflected in s.60(4) VATA.

[42]The report went on to consider the position in relation to the 'regulatory matters' referred to at paragraph 33 above. It recommended the abolition of the criminal sanction for all such regulatory matters, with the substitution of a system of civil penalties in lieu. In this respect it recommended the enlargement of the VAT offence code by the enactment of a civil default of 'gross negligence'.

[43]So far as fraud and dishonesty were concerned, the Report noted (at paragraph 18.4.11) that the requirement that fraud had to be provable to the criminal standard before penalties could be exacted meant that many large understatements arising through demonstrable lack of care, but short of fraud provable to that standard, went unpenalised. It continued (at paragraph 18.4.16) as follows:

"We have noted … the high resource cost of the investigation of fraud to the criminal standard, and the understandable constraints this imposes on the investigation of the smaller frauds. We recognise the need for effective criminal sanctions to deal with the more serious frauds, and we make proposals below to improve the VAT offence code in this sense. However …. while more than 80 per cent of VAT fraud cases are now compounded because of the entirely criminal character of the VAT offence code all VAT fraud cases have to be investigated and reported to the criminal standard, even if at an early stage it can be identified that the case is one that is likely to be compounded. By comparison, the Inland Revenue offence code providing civil penalties for fraud, buttressed by inducement provisions, allows a "civil" form of investigation settlement, with the burden of criminal investigation being taken up only in those cases identified from the outset or in their course as sufficiently heinous to justify prosecution. In those cases where "civil" investigation techniques suffice to secure evidence of the true extent of the fraud, the process is an economical one, at least by comparison with the cost of a comparable criminal investigation. The investigation of acts of dishonesty in relation to tax matters in a "civil" style, reinforced by inducements, rather than as criminal offences under the Judge's Rules, are as such generally welcome to our witnesses and we heard no consistent body of criticism of the lower civil burden of proof in such cases as being unfair to the taxpayer. "

We conclude that a new default should be introduced into VAT law and we use the term "civil fraud" to distinguish it from similar dishonest conduct, "fraud", prosecuted in the criminal courts. As we discuss also at chapter 19.2.9, the difference in terminology marks the difference in the investigatory techniques and sanctions applied, rather than a difference in the essential nature of the conduct." (emphasis added)

[44]Later, in relation to criminal penalties in VAT, the report stated (at paragraph 18.4.20):

"… we .. accept the need for effective criminal sanctions to deal with the more serious cases of fraud. We reject the view that criminal offences should not be created by revenue statutes; on the contrary, we think it desirable that VAT offences code should be comprehensive, embracing both civil and criminal penalties applying to the entire range of defaulting conduct commonly encountered. On this basis we now discuss the criminal offences and penalties which should be provided under the VAT offence code."

The report then went on (at paragraph 18.4.38) to propose that:

"In the case of dishonest conduct investigated as civil fraud we propose … that the penalty attaching should be capable of mitigation from 100 per cent down to 50 per cent, but no lower, as a means of encouraging the co-operation of the taxpayer in the investigation process. Where an investigation disclosing such a default is not concluded by a settlement, assessments should be made to recover the tax undeclared, interest thereon and a penalty calculated at such rate between 50 per cent and 100 per cent as Customs and Excise consider warranted by the co-operation received. A trader should have the right to dispute all those elements assessed, by appealing to the VAT Tribunal. The tribunal should be entitled to adjudicate on any or all of the following matters, where these are disputed, in a single hearing: (a) the assessment or the amount of the assessment of tax on the normal grounds, (b) whether the fault amounts to a civil fraud on the balance of probabilities … (c) the amount of interest, (d) the rate of penalty the Tribunal considers appropriate in the circumstances within the range of 50 per cent to 100 per cent of the culpable tax …."

[45]In relation to the choice between the use of civil penalties or criminal proceedings in relation to offences involving dishonesty, the report made no recommendation, but stated at paragraph 18.4.50:

"In our view the relative use of civil or criminal investigation techniques is a matter for Customs and Excise to regulate, weighing the competing calls on their resources, the nature of the fraud suspected and the extent to which civil or criminal investigation techniques are capable of turning up sufficient admissible evidence to satisfy the respective burdens of proof for criminal or civil proceedings. Whether investigators should switch from the civil to the criminal mode, or vice versa, in the course of an investigation, as may happen now in direct tax investigations, seems to us also essentially a matter for the Department, in the light of experience and the views and thoughts of Tribunals as to fairness to the accused in the circumstances of a particular case."

THE RELEVANT FEATURES OF THE VAT CIVIL PENALTY CODE

[46]S.60 VATA was enacted pursuant to the Keith Report recommendations for a civil penalty code for VAT offences; however, the recommendation that mitigation of the penalty imposed for offences involving dishonesty should not exceed 50 per cent was not followed, s.70 permitting reduction to such amount (including nil) as the Commission should think proper.

[47]Following the recommendations of the Keith Report, s.13 of the Finance Act 1985 introduced a penalty for evasion of VAT where it could be shown that a taxpayer's conduct involved dishonesty, the terms of which are now embodied in s.60 VATA. S.14 of the Finance Act 1986 introduced a provision allowing the recovery of the penalty from directors and managing officers where it could be shown that the facts giving rise to the penalty was attributable to their dishonesty. That is now s.61 VATA. S.8(1) of FA 94 introduced the power to issue a civil evasion penalty for evasion of excise duty involving dishonesty.

[48]Before us the parties have emphasised various features of the civil penalty code introduced by VATA. In the following list, the Commissioners emphasise points(1) to (4), while the respondents emphasise points (5) to (10). (1) S.60(4)(a) expressly refers to 'an amount due by way of a civil penalty'.

(2) Such penalties were provided for as a deliberate de-criminalisation of the VAT and duty penalty scheme.

(3) They are alternatives to criminal penalties which are available in more serious cases.

(4) The taxpayer is dealt with by means of a civil procedure, subject to the lower burden of proof (balance of probability) and avoids the stigma of a criminal conviction.

(5) The penalties require a finding of dishonesty.

(6) There is no ascertainable legal distinction or touchstone of liability as between treatment of a taxpayer under the civil penalty provisions of s.60 and his prosecution under s.72. Despite the invitation of the court, neither counsel was able to think of circumstances (apart from the evidence necessary to satisfy the burden of proof) in which establishment of liability under s.60 could not equally suffice for a prosecution under the provisions of s.72.

(7) The distinction in application depends upon the discretion of the Customs and Excise, which in turn depends upon internal criteria relating to the seriousness of the case, the availability of resources and the likelihood of obtaining a conviction in criminal proceedings, bearing in mind the different burden of proof.

(8) The function of the civil penalties is not compensatory. They are imposed in addition to the assessed liability for tax or duty and the interest recoverable thereon.

(9) The function of the penalties is one of punishment and deterrence vis-à-vis the individual taxpayer and general deterrence so far as taxpayers at large are concerned.

(10) The penalties (subject to mitigation) are substantial, being 100 per cent of the tax evaded or sought to be evaded. THE PRACTICE IN ADMINISTERING THE CODE

[49]Following the introduction of civil evasion penalties, Customs and Excise continued to investigate cases of dishonest evasion which it regarded as aggravated or serious with a view to criminal proceedings in cases where the VAT evaded was at least £25,000 in total over the previous three years; or where the evasion involved one or more businesses whose activities were solely or primarily bogus or undertaken as a systemic fraud against tax; or where, during the course of an investigation for a civil offence, the taxpayer continued in a deliberate intent to deceive; or where the offence was perpetrated by lawyers, accountants or other advisors of businesses in respect of VAT matters, current or former tax officials, or persons who occupied a prominent position in the field of law or government; or where the evasion was executed in conjunction with other criminal activities; or where there had been a previous VAT or Customs and Excise offence which had resulted in imposition of a penalty, compounding of proceedings or a criminal conviction. However, following revision of its prosecution policy with effect from 1 September 2000, Customs and Excise focused criminal investigation and prosecution activity on the most serious cases of VAT evasion where a strong deterrent message is required and it is considered that the use of civil penalties would not achieve this. It is no longer the policy to prosecute solely on the basis of the amount of revenue involved and the civil penalty procedure may now be used in cases involving several hundred thousand pounds of VAT avoided. This is regarded as a more cost-effective use of resources in most cases of dishonest evasion. In July 2001, the prosecution policy was further revised to focus Customs and Excise investigation and prosecution activity on tackling major and persistent offenders, conviction of whom is deemed likely to have strong deterrent effect and to result in custodial sentences.

[50]So far as civil evasion penalties are concerned, after undertaking whatever preliminary investigations are considered appropriate, an officer will interview the taxpayer and secure any other available evidence, including the relevant records of the business. Before the interview commences, a copy of VAT Notice 730 ("Civil Evasion Penalty Investigations: Statement of Practice") is handed to the taxpayer and, if present, his or her representative. The officer will ensure that the taxpayer understands the content of the notice, which outlines the approach of Customs and Excise to reaching an agreement on the undeclared VAT and how the taxpayer can reduce any penalty imposed by co-operating in the investigation. The notice informs the taxpayer that he can reduce the penalties significantly by promptly disclosing full details of his true liability and by the extent to which he co-operates over the whole enquiry. So far as disclosure is concerned, he is told that early and truthful admission at interview of the extent of the arrears and why they arose will attract a considerable reduction. He is also told that he can receive a further major reduction if he supplies information promptly, attends interviews, answers questions honestly and accurately, and gives the relevant facts to establish his true liability. He is told that, in various circumstances, reductions from the full penalty figure will normally be made up to certain maximum percentages specified, namely up to 40% for an early and truthful explanation as to why the arrears arose and their true extent, up to 25% for co-operation in substantiating the true amount of the arrears, and up to 10% for attending interviews and producing records and information as required. Thus the maximum reduction generally obtainable is 75% of the tax under-declared though, in exceptional circumstances, consideration may be given to a further reduction. The Customs and Excise term this method of dealing with the taxpayer the 'inducement' procedure.

[51]The officer does not formally caution the taxpayer. He will explain that the investigation is not being conducted with a view to prosecution for VAT evasion, that the taxpayer is not obliged to co-operate in the Customs investigation and that it is a decision for him to decide whether or not to speak to the investigation officers or assist in the investigation generally. Officers are able to compel the disclosure of documents and other material by virtue of their powers under Schedule 11, paragraph 7(2) of VATA which gives them the power to require the production of documents relating to supplies of goods or services, and acquisitions or importations which are made in the course or furtherance of business. Where a trader refuses to produce records on request, it is Customs policy to remind him of his legal obligations and serve a form of Notice Demand to produce specified records. If the taxpayer fails to comply with such a notice, he is in breach of the VAT regulatory provisions and is liable to a regulatory civil penalty under s.69(3) of the VATA.

[52]Once the investigation is complete, a decision is made as to whether dishonesty has been established and whether and in what amount a penalty will be imposed.

[53]Once the taxpayer has received notice of the penalty he has a right of appeal to the VAT and Duties Tribunal, which appeal is governed by the civil procedures set out in the Value Added Tax Tribunal Rules 1986.

[54]By way of contrast, if, under the prosecution policy criteria, the Customs and Excise consider that a criminal investigation with a view to prosecution is appropriate, and there is sufficient evidence to demonstrate reasonable grounds to suspect fraud prior to approaching the taxpayer, procedures appropriate to a criminal investigation will be followed. Customs investigators have powers to obtain search warrants and access orders and to arrest suspects, which powers are not available in a civil case. In addition, they conduct interviews in accordance with the requirements of the Police and Criminal Evidence Act 1984 ("PACE"), which normally take place in the presence of the taxpayer's solicitor and are conducted under caution without use of, or reference to, the inducement procedure. THE STRASBOURG CASE LAW

[55]We have been referred to a number of decisions of the Strasbourg court. In Adolf –v- Austria (1982) All EHRR 313, the applicant was the subject of a complaint of assault, the police being instructed to investigate whether a punishable offence had been committed. Such an investigation constituted the commencement of criminal proceedings. The Austrian District Court, at the request of the public prosecutor, terminated the proceedings without a hearing on the grounds that the conditions of section 42 of the Penal Code had been met, namely, that the degree of guilt was slight, the act had only trifling consequences and that punishment was not necessary as a deterrent. The court, while finding that there had on the facts been no violation of the applicant's rights under Article 6, held unanimously that Article 6 was applicable to the District Court proceedings. It held that, in ascertaining whether there was a 'criminal charge' for the purposes of Article 6(1), or whether the applicant was 'charged with a criminal offence' for the purposes of Article 6(2) and (3):

"These expressions are to be interpreted as having an autonomous meaning in the context of the Convention and not on the basis of the meaning in domestic law. The legislation of the State concerned is certainly relevant, but it provides no more than a starting-point in ascertaining whether at any time there was a 'criminal charge' against Mr Adolf or he was 'charged with a criminal offence'. The prominent place held in a democratic society by the right to a fair trial favours a 'substantive' rather than a 'formal', conception of the 'charge' referred to by Article 6; it impels the court to look behind the appearances and examine the realities of the procedure in question in order to determine whether there has been a 'charge' within the meaning of Article 6. In particular, the applicant's situation under domestic legal rules in force has to be examined in the light of the object and purpose of Article 6,namely the protection of the rights of the defence." (paragraph 30) The court went on to say: "

As regards the concept of a non-punishable act, it is clearly in line with the title and text of section 42 … nevertheless, non-punishable or unpunished criminal offences do exist and

Article 6 of the Convention

does not distinguish between them and other criminal offences; it apples whenever a person is 'charged with any criminal offence'." (paragraph 33)

[56]In Engel and others –v The Netherlands (No 1) 1976 I EHRR 647 the Strasbourg court considered the application of the concept of a 'criminal charge' in respect of various penalties imposed upon the applicants for offences against military discipline in a military court. In holding that Article 6 was applicable, the court observed:

"80. All the Contracting States make a distinction of long standing, albeit in different forms and degrees, between disciplinary proceedings and criminal proceedings. For the individual affected, the former usually offer substantial advantages and comparisons with the latter, for example as concerns the sentences passed. Disciplinary sentences, in general less severe, do not appear in the person's criminal record and entail more limited consequences. It may nevertheless be otherwise; moreover, criminal proceedings are ordinarily accompanied by fuller guarantees."

The court stated that the autonomous concept of a 'criminal charge' was still applicable in the context of disciplinary proceedings. Limiting itself to 'the sphere of military service' it repeated that the categorisation under the law of the respondent state: "provides no more than the starting point. The indications so afforded have only a formal and relative value and must be examined in the light of the common denominator of the respective legislation of the various Contracting States." (paragraph 82) It went on to state that: "… the very nature of the offence is a factor of greater import" and continued that it was necessary also to: "take into consideration the degree of severity of the penalty that the person concerned risks incurring. In a society subscribing to the rule of law, there belong to the 'criminal' sphere deprivations of liberty liable to be imposed as punishment, except those which by their nature, duration or manner of execution cannot be appreciably detrimental. The seriousness of what is at stake, the traditions of the Contracting States and the importance attached by the Convention to respect for the physical liberty of the person all require that this should be so." (paragraph 82)

[57]In Ozturk –v Germany (1984) ECHRR 409 the Strasbourg Court was concerned with a case in which the applicant had been charged with a traffic offence which, under German law, was regarded as 'regulatory' only, having been 'de-criminalised' under a scheme in relation to road traffic offences. A regulatory offence was defined as 'an unlawful and reprehensible act, contravening a legal provision which made the offender liable to a fine within prescribed limits, the amount of the fine being fixed in each case by reference to the seriousness of the offence, the degree of misconduct attributable to the offender and (for minor offences) the offender's financial circumstances'. If, however, the act constituted both a regulatory and a criminal offence, only the criminal law was applicable. Nonetheless, because no criminal penalty was imposed, the act could be punished as a 'regulatory offence'. If without having established inability to pay, the person concerned had not paid the fine in due time, the person might be made the subject of a detention order under the Code of Criminal Procedure.

[58]The court recognised that the legislation in question marked an important stage in the history of the reform of German criminal law but stated nonetheless that: "According to the ordinary meaning of the terms, there generally come within the ambit of the criminal law offences that make their perpetrator liable to penalties intended, inter alia , to be deterrent and usually consisting of fines and of measures depriving the person of his liberty. In addition, misconduct of the kind permitted .. continues to be classified as part of the criminal law in the vast majority of the Contracting States … [where] .. such misconduct, being regarded as illegal and reprehensible, is punishable by criminal penalties." (paragraph 53) The court went on to observe that the penalties imposed: "retained a punitive character, which is the customary distinguishing feature of criminal penalties. The rule of law infringed by the applicant has, for its part, undergone no change of content. It is a rule that is directed, not towards a given group possessing a special status – in the manner, for example, of disciplinary law – but towards all citizens in their capacity as road users; it prescribes conduct of a certain kind and makes the resultant requirement subject to a sanction that is punitive. Indeed, the sanction – and this the government did not contest – seeks to punish as well as to deter …. Above all, the general character of the rule and the purpose of the penalty, being both deterrent and punitive, suffice to show that the offence in question was, in terms of

Article 6 of the Convention

, criminal in nature." (paragraph 53)

[59]In Bendenoun –v- France

(1994) 18 EHRR 54

, the applicant was a French national resident in Switzerland who was prosecuted and fined by the French customs and tax authorities in the French Administrative Courts, being later sentenced to imprisonment for tax evasion by the French Criminal Courts. In relation to the administrative proceedings he complained of violation of his Article 6 rights. The French government maintained that the proceedings did not relate to a criminal charge, because tax surcharges imposed on the applicant bore all the hallmarks of an administrative penalty within the meaning of the court's case law. Nonetheless, the Strasbourg court held that Article 6 applied because: "In the first place, the offences with which Mr Bendenoun was charged came under Article 1729(1) of the General Tax code. That provision covers all citizens in their capacity as taxpayers and not a given group with a particular status. It lays down certain requirements, to which it attaches penalties in the event of non-compliance. Secondly, the tax surcharges are intended not as pecuniary compensation for damage but essentially as a punishment to deter re-offending. Thirdly, they are imposed under a general rule whose purpose is both deterrent and punitive. Lastly, in the instant case the surcharges were very substantial amounting to 422,434 FF in respect of Mr Bendenoun personally and 570,398 FF in respect of his company; and if he failed to pay, he was liable to be committed to prison by the criminal courts. Having weighed the various aspects of the case, the court notes the predominance of those which have a criminal connotation. None of them is decisive on its own, but taken together and cumulatively they made the "charge" in issue a "criminal" one within the meaning of Article 6(1) which was therefore applicable." (paragraph 47)

[60]Bendenoun is a case upon which the respondents strongly rely. They point out that all four elements relied upon by the Strasbourg Court in that case are present in the instant cases save for the fact that the applicant in Bendenoun was liable to be committed to prison for non-payment. However that is not a requirement which has been regarded as essential in subsequent decisions of the Strasbourg Court.

[61]In AP, MP and TP –v- Switzerland

(1997) 26 EHRR 541

, fines had been imposed on the applicants in respect of tax evasion by their late husband and father, pursuant to provisions of Swiss law which permitted such a procedure. The court upheld the plea of the applicants on the basis that it is a fundamental rule of criminal law that criminal liability does not survive the person who has committed the criminal act. However, in dealing with the applicability of Article 6 it stated:

"39. The court reiterates that the concept of "criminal charge" within the meaning of Article 6 is an autonomous one. In earlier case law the court has established that there are three criteria to be taken into account when it is being decided whether a person was "charged with a criminal offence" for the purposes of Article 6. These are the classification of the offence under national law, the nature of the offence and the nature and degree of severity of the penalty the person concerned risks incurring."

Having held that the fines were, in the opinion of the court, "not inconsiderable" the court went on to state:

"41, As regards the nature of the offence, it is noted the tax legislation lays down certain requirements, to which it attaches penalties in the event of non-compliance. The penalties, which in the present cases take the form of fines, are not intended as pecuniary compensation for damage but are essentially punitive and deterrent in nature. 42. As regards the classification of the proceedings under national law, the court attaches weight to the finding of the highest court in the land, the Federal Court in its judgment in the present case, that the fine in question was "penal" in character and depended on the "guilt" of the offending taxpayer."

[62]The court in AM, MP and TP was concerned with a case where the tax evasion was punishable by a substantial fine; however, the offender was not subject to any process of imprisonment in default. Subsequently, in Louko –v- Slovakia (4/1998/907/1119) the court was again concerned with a minor offence which the Constitutional Court of Slovakia described as "characterised, in general, by wrongful breach of law or legal obligations in different spheres of public administration which represents a minor danger to the society. Because of its character, a minor offence is not subject to examination by a court …. The examination of minor offences falls within the competence of administrative authorities". The applicant's offence fell to be dealt with under the Code of Civil Procedure, subject to review by a court in cases of a fine exceeding SKK 2000. In holding that Article 6(1) applied, the Strasbourg court noted (paragraph 56) that the offence was not characterised under domestic law as "criminal", but observed (paragraph 57) that indications furnished by the domestic law have only relative value (see Ozturk ). So far as the nature of the offence was concerned, the court observed that the legal rule infringed by the applicant was directed to all citizens and not towards a given group possessing a special status. It also noted the fine and order for costs imposed and observed (paragraph 58): "The fine imposed on the applicant was intended as a punishment to deter reoffending. It has a punitive character which is the customary distinguishing feature of criminal penalties". referring to Ozturk and AP, MP and TP –v Switzerland in this respect.

[63]The Strasbourg court did not proceed further to close examination of the nature and degree of severity of the penalty risked by the appellant, stating as follows (paragraph 58):

"The government contended … that the minor offence in issue had several features which distinguished it from offences within the realm of the criminal law stricto sensu. However the elements relied on by the government, such as the fact that the commission of the offence was not punishable by imprisonment and is not entered on the criminal record, are not decisive of the classification of the offence for the purpose and applicability of Article 6(1) (see the above-mentioned Ozturk judgment cp. 20-21, para 53). In sum, the general character of the legal provision infringed by the applicant together with the deterrent and punitive purpose of the penalty imposed on him, suffice to show that the offence in question was, in terms of Article 6 of the Convention, criminal in nature. Accordingly, there is no need to examine it also in the light of the third criterion stated above .. The relevant lack of seriousness of the penalty at stake cannot deprive an offence of its inherently criminal character (see the above mentioned Ozturk judgment, p.21, para 54)."

[64]Finally, in Georgiou –v- United Kingdom (Application No 40042/98), reported at

[2001] STC 80

, the Strasbourg court ruled that a civil penalty imposed for dishonest evasion of VAT pursuant to s.13(1) of the Finance Act 1985 (the terms of which were identical to s.60 VATA), amounted to a criminal charge within the meaning of Article 6(1): see paragraphs 35 and 36 above. DISCUSSION The application of the case law above cited

[65]It seems clear from the case law above cited that in considering the three criteria routinely applied by the Strasbourg Court for the purpose of determining whether the applicant is the subject of a "criminal charge", the first criterion, namely the categorisation of the allegation in domestic law, is no more than a starting point for the classification, and is not decisive of the nature of the allegation. If the offence the subject of the allegation is not criminalised by the national law, the court determines whether it is nonetheless criminal in character for the purposes of Article 6 by proceeding to the second and third criteria, namely the nature of the offence and the severity of the penalty which it invokes. As stated in Louko, the second and third criteria are alternative rather than cumulative. However, that is not an approach which appears to have been adopted in practice and, as also stated in Louko, a cumulative approach may be adopted where the analysis of each criterion does not lead to a clear conclusion; see Bendenoun.

[66]Under the second criterion, the court considers whether or not, under the law concerned, the 'offence' is one which applies generally to the public at large or is restricted to a specific group. If the former, then despite its "de-criminalisation" by the national law, it is apt to be regarded as criminal. Further, if a punitive and deterrent penalty is attached, it is likely to be regarded as criminal in character, even in cases where the penalty is in the nature of a fine rather than imprisonment. On the other hand, where the offence is limited to a restricted group, as is generally the case in relation to disciplinary offences, the court is unlikely to classify a charge under the applicable disciplinary or regulatory code as criminal, at least unless it involves or may lead to loss of liberty.

[67]In the context of disciplinary proceedings, the Strasbourg court has placed great emphasis on the seriousness of the penalty or imprisonment attached to the offence as the touchstone for holding the proceedings criminal rather than disciplinary: see Engel and see Campbell and Fell –v- United Kingdom

(1984) 7 EHRR 165

, a case concerning a serious prison disciplinary offence resulting in an award of 570 days' loss of remission. The latter case was distinguished by the Divisional Court in the recent decision of Greenfield –v- The Secretary of State for the Home Department (Case No: CO/248/2001), 22 nd February 2001, in a case where the maximum penalty which could be awarded for the prison disciplinary offence in question was 42 additional days, and was wholly different in kind from the penalty which might have been imposed for an equivalent criminal charge. It is plain that the imposition of a substantial fine in disciplinary proceedings will not in itself render charges criminal in nature: see Brown –v- United Kingdom (1998) 28 EHRR CD 233, in which it was held that the fact that a £10,000 fine was imposed by the Solicitors' Complaints Tribunal did not attract the provisions of Article 6. However, outside the context of disciplinary proceedings, and in particular, in the field of tax evasion, it appears that a substantial financial penalty which is imposed by way of punishment and deterrence will suffice: see Bendenoun and Georgiou .

[68]Finally, it is to be observed that the treatment of the categorisation of the allegation in domestic law merely as a starting point marginalises, and indeed largely renders irrelevant, the rationale underlying a national law which seeks to de-criminalise conduct which would otherwise be treated, or generally regarded, as criminal in nature. The trend of the Strasbourg decisions, exemplified in Bendenoun and Georgiou has been to fasten upon and emphasise the applicability of the second and third criteria, despite the view reflected in the opinions of the dissenting judges in Ozturk to the effect that de-criminalisation, at least of "minor offences", may work in the general interests of individuals by elimination of the moral judgment and the drawbacks customarily connected with criminal proceedings: see in particular the dissenting opinion of Judge Bernhardt, with which Judge Thor Vilhjalmsson also agreed. Equally the Strasbourg court has ignored the observations of Judge Matscher that differences in the conceptions which underlie criminal and "regulatory" offences and, in particular, differences in their legal effects whether of substance or procedure, affect their very nature and that excessively broad interpretation of the concept of "criminal" and "civil" for the purpose of extending the guarantees included in Article 6 is not an appropriate solution.

[69]The view last stated has throughout informed the submissions of Mr Parker QC for the Commissioners. However, his submissions, and the counter-arguments of Miss Sharpston QC for the respondents, may best be elaborated in relation to the three criteria. The classification of the proceedings in domestic law

[70]In seeking to show that the Chairman erred in his application of the three criteria and in following the Strasbourg decision in Georgiou, Mr Parker has submitted(1) that the classification of the penalty for dishonesty as a civil penalty (both impliedly, by contrast with s.72, and expressly in the language of s.60(4)(a)), should be accorded great weight.

(2) Justification for such classification and the procedures associated with it is to be found in the plain intention of the legislature to decriminalise most of the VAT and duties penalty system, and to provide an alternative to criminal prosecution and punishment for the most serious cases of dishonesty.

(3) The statutory regime for civil penalties is fair, beneficial to the taxpayer and supported by the sound public policy rationale propounded in the Keith Report, which apparently had the support of the various interest groups which made submissions to it, including the traders subject to such regime.

(4) Creation of the civil penalties scheme was not an exercise in re-classification of a type which the court in Ozturk feared that "might lead to results incompatible with the object and purpose of the convention" (see Ozturk para 49); it involved the creation of an alternative regime which in less 'serious' cases of dishonest evasion replaced criminal procedures with a civil process regulated by the VAT Tribunal Rules 1986. Those Rules set out procedures akin to those in ordinary civil litigation in relation to Statements of Case, Defence and Reply (Rules 7 and 8), Particulars (Rule 9), Directions (Rule 11), Amendments (Rule 14), Extension of time (Rule 19), Disclosure (Rule 20), Witness Statements (Rule 21), Witness Summonses (Rule 22), Procedure at Hearing (Rule 27) and Evidence (Rule 28), which proceedings regulate the ultimate determination of liability by a Tribunal whose decision does not involve the status or stigma of a criminal conviction.

[71]Miss Sharpston QC for the respondents accepts that the penalties imposed upon them are described in each of the relevant statutory schemes with the epithet 'civil'. However, she submits(1) that the term 'civil penalty' does not necessarily exclude a construction that such penalty is in fact criminal in nature , any more than a term such as 'fixed penalty' excludes certain road traffic offences from being criminal in nature.

(2) She relies upon the extract from the Keith Report quoted in italics at paragraph 39 above as showing that the difference in the nature of the dishonest conduct invoking a civil process under s.60 or prosecution under s.72 is non-existent. While there is a difference in the investigatory techniques and the penalties to which the taxpayer is subject, there is no difference in the essential nature of the 'charge'. She relies on the recognition in paragraph 18.4.50 of the Keith Report (see paragraph 21 above) that the relative use made of the civil and criminal modes of procedure is essentially a matter to be left to the experience and views of the Commissioners and so, subject to changing policy guidelines, it has remained.

(3) Miss Sharpston relies upon the clear view of the Strasbourg court that the domestic classification is in no sense determinative and asserts that it is also clear that the essential nature of the conduct in respect of which the penalty is imposed remains criminal, albeit s.60 VATA introduces a more summary and convenient method of disposal for the discretion and for the benefit of Customs and Excise, whether or not it may also be regarded as "beneficial" to the taxpayer. The Nature of the Offence

[72]Mr Parker accepts that the penalties under s.60 have features which the Strasbourg Court has held militate in favour of a finding that a penal measure is criminal in nature. He accepts that it is appropriate to regard the s.60 provisions as applying in principle to all citizens qua taxpayers and not to a restricted group. He further accepts that the function of the penalties is not to compensate Customs and Excise but one of punishment and deterrence, albeit the penalty is calculated by reference to the amount of unpaid tax, subject to reduction for mitigation. Finally, he accepts that the penalties require a finding of "dishonesty" which is generally regarded as a matter for criminal sanction and would generally, subject to the discretion of the Customs and Excise, be amenable to prosecution under s.72. Nonetheless, he submits that both the VATA and FA 94 plainly envisage that the circumstances giving rise to a penalty need not be treated as giving rise to a criminal charge. Miss Sharpston relies upon the very matters conceded by Mr Parker. She also makes the point that the absence of a rule imposing imprisonment in the event of non-payment of a tax penalty does not indicate that a "criminal charge" is not involved: see the views of the Strasbourg court in Ozturk, Louko, and Georgiou. She submits that the very substantial nature of the penalties able to be imposed, albeit subject to the criteria for mitigation applied by the Customs and Excise, constitute a substantial punishment for an offence of dishonesty. The Nature and Degree of Severity of the Penalty

[73]Mr Parker relies upon the absence of any risk of imprisonment. He submits that the principal concern in Engel was that, in a society subscribing to the rule of law, deprivations of liberty liable to be imposed as a punishment belong to the 'criminal sphere' (see paragraph 82 of Engel , quoted at paragraph 51 above). Thus the absence of any threat of imprisonment in the instant cases is a powerful indicator that the penalties do not give rise to a criminal charge. He also submits that the maximum penalty to which the court should have regard should not be the figure of 100 per cent of the tax due, because the starting point for the Tribunal's deliberation is the level of the penalty actually imposed, taking into account mitigation. Miss Sharpston asserts that the Strasbourg jurisprudence has moved on since Engel and that the subsequent decisions demonstrate that the scale of the penalties involved in the instant cases, whether before or after mitigation, and bearing in mind their penal and deterrent (as opposed to compensatory) effect, are sufficiently burdensome to render the change criminal under the third criterion. She also submits that it is the exposure of the taxable person at the time of charge, namely to 100 per cent of the tax alleged to have been evaded, which the court should take into account.

[74]I am reluctantly persuaded that the submissions for the respondents must prevail, as they prevailed before the Chairman below. I am reluctant, because in my view the rationale for the VAT Civil Penalties Scheme was convincingly propounded in the Keith Report as a just balance between the legitimate interests of the Customs and Excise in improving the collection of a tax in relation to which widespread evasion was prevalent, and the interests of the taxpayer in avoiding the travails of a criminal prosecution and the stigma of conviction of a criminal offence of dishonesty in cases of deliberate evasion. It also represented a sensible rationalisation of the schemes for collecting tax and penalising evasion as between the Customs and Excise on the one hand and the Inland Revenue on the other. Nor am I aware of any widespread dissatisfaction or allegations of injustice in relation to the procedures followed since the adoption of the Keith recommendations by legislation. I am nonetheless persuaded by what I regard as the clear state of the Strasbourg case law in relation to a case of this kind.

[75]So far as the first criterion is concerned, it is plain that the classification of the penalties provided for as 'civil', albeit coupled with a procedure appropriate to civil rather than criminal proceedings, cannot be regarded as more than the starting point where the levying and enforcement of the penalty concerned is designed to punish and deter members of the public at large in respect of dishonest conduct. Furthermore, the classification does not represent a decision on the part of the legislature to de-criminalise dishonest evasion of VAT, given the parallel provision under s.72(1) for the criminal prosecution of any person knowingly concerned in the fraudulent evasion of VAT and, under 72(3), of any person acting fraudulently in the respects therein set out. This, rather, creates alternative regimes in respect of which the Customs and Excise may nonetheless decide in the course of an investigation, to change from one to the other. The provisions of Article 6 however are concerned to protect a potential defendant to criminal proceedings from an early stage, and the nature and consequences of the 'charge' may affect the degree of co-operation which he is prepared to afford in the course of an investigation.

[76]So far as the second criterion is concerned, the nature of the offence suspected and sanctioned by the application of civil penalties is fraud/dishonesty in respect of the tax payable or actually payable, whether under s.60 or s.72 VATA, and the Customs and Excise enjoy a discretion as to whether, on a particular set of facts to apply a civil penalty or to prosecute. As observed by the Chairman at paragraph 7 of his judgment below (p.315):

"Cases where section 60 penalties are in issue usually involve allegations of dishonest and systemic suppressions of sales or use of fictitious invoices over a number of accounting periods … to those of us with judicial experience of criminal proceedings, the level of criminality alleged against the appellant does not appear significantly different from that involved in Crown Court fraud trials."

He went on to observe:

"The essential contrasts are these. The appeal before the Tribunal is quicker and less demanding on the Commissioners' resources. The standard of proof is lower. Criminal proceedings do not apply. Instead the procedure is regulated by the VAT Tribunal Rules 1986. In particular, the Tribunal has a broad discretion in respect of the evidence it may admit under Rule 28. The imposition of a penalty does not give rise to a criminal record and loss of liberty is not a possibility."

[77]While the essential contrasts to which the Chairman referred are highly desirable from the point of view of the efficient collection of tax and (as I have already observed) there is no reason to suppose they lead to widespread unfairness, they are procedural in nature rather than going to the nature of the offence itself. The Strasbourg court does not adopt an approach which allows procedural features or considerations to govern or define the nature of the offence under consideration. Yet those are the features upon which Mr Parker has been obliged principally to place reliance under criterion 1. His submissions under criterion 2 have consisted principally of concessions.

[78]So far as the third criterion, the nature and degree of the penalty, is concerned, again the weight of Strasbourg authority is in favour of the respondents in the sense that, in the area of tax evasion at least, such authority does not require that, for the purposes of a 'criminal' charge, it is necessary to demonstrate that the penalty to which the taxpayer is subject involves, or may involve, imprisonment. It is sufficient that it is substantial and its' purpose is punitive and deterrent. It seems to me that those requirements are made out in the case of these respondents.

[79]Since first drafting this judgment, I have had drawn to my attention the decision of Jacob J in King –v-Walden (HM Inspector of Taxes), 18 th May 2001 (Case No: CH/2000/APP/000153) in which, applying the criteria as considered in the Strasbourg authorities to which I have referred, and persuaded by the analysis and reasoning of the Chairman in this case, he held that the system for imposition of penalties for fraudulent or negligent delivery of incorrect tax returns or statements is "criminal" for the purposes of Article 6(2). In doing so, he plainly went further than the decision in this case, the reasoning in which is largely premised upon penalties in respect of dishonesty. However, whereas the conclusions of Jacob J go further than those which I have expressed, they are not inconsistent with them. THE IMPLICATIONS OF THE APPLICATION OF ARTICLE 6

[80]As the Chairman made clear in paragraph 22 of his decision, the issue in this appeal affects a large number of appellants to the Tribunal, whose appeals await its outcome. In that respect, it should be made clear that the appeal in this case concerns a decision upon a preliminary point of a general nature. Although I have set out the bare facts of the respondents' appeals to the Tribunal, each appeal gives rise to individual points of procedure, in respect of which objection is taken or certain legal consequences are said to follow which have not been argued before this court, or indeed below. Each will call for an individual ruling by the Tribunal in the light of this court's decision. The same will be true of the substantial number of cases awaiting disposal which have apparently raised a yet wider variety of points said to arise on the basis that Article 6 applies, not simply to the imposition of penalties for dishonest evasion under s.60, but in relation to other penalties, in particular under s.63 VATA (Penalty for mis-declaration or neglect resulting in VAT loss for one accounting period equalling or exceeding certain amounts).

[81]So far as s.63 is concerned, it is plain that little guidance will be afforded by this decision. S.63 is no more than a regulatory provision which, unlike dishonest evasion under s.60, gives rise to no apparent criminal offence, whether under the general law or any other provision of the VATA. Further, the penalty is limited to 15% of the VAT which would have been lost if the inaccuracy in the return made by the taxpayer had not been discussed.

[82]We have been informed that, whereas a variety of points await disposal, the Commissioners' principal concern relates to their desire to make continued use of the 'inducement' procedure as a method of obtaining the co-operation of the taxpayer for the purpose of establishing the amount of tax evaded and imposing a civil penalty discounted upon the basis of the degree of co-operation received. It is envisaged that the Customs and Excise may be vulnerable to the Tribunal excluding as inadmissible evidence obtained during an interview, or subsequently, as a result of supplying to the taxpayer the Statement of Practice in VAT Notice 730. If such rulings were to become widespread it would significantly affect the ability of Customs and Excise successfully to defend appeals and would threaten the basis of the whole of the civil evasion penalty regime. Arguments have apparently already been 'flagged' to the effect that the inducement procedure may amount to a breach of the right to silence and the right against self-incrimination. Whether this is correct has not been argued before us. However, I would only observe that the fears of the Commissioners seem to me likely to prove unfounded in this respect.

[83]It appears that the inducement procedure, at least as refined in December 2000, makes explicit to the taxpayer, in addition to the information supplied in VAT Notice 730, that the civil evasion investigation is not being conducted with a view to prosecuting the trader for VAT evasion, that the trader is not obliged to co-operate in the Customs investigation, and it is entirely a decision for the trader to decide whether or not to speak to the investigating officer or assist generally in the Customs investigation. It must be remembered that the requirements of Article 6(1) in relation to a fair trial, together with what has been held to be the implicit recognition of a right to silence and a privilege against self-incrimination, are of a general nature and are not prescriptive of the precise means or procedural rules by which domestic law recognises and protects such rights.

[84]It by no means follows from a conclusion that Article 6 applies that civil penalty proceedings are, for other domestic purposes, to be regarded as criminal and, therefore, subject to those provision of PACE and/or the Codes produced thereunder, which relate to the investigation of crime and the conduct of criminal proceedings as defined by English law . Any argument as to whether and how far that Act and the Codes apply is one which will have to be separately considered if and when it is advanced. In this context, however, the specific provisions of s.60(4) VATA are plainly of considerable importance. I would merely add my view that, if matters are made clear to the taxpayer on the lines indicated in paragraph 77 above at the time when the nature and effect of the inducement procedure are also made clear to him (whether by VAT Notice 730 or otherwise), it is difficult to see that there would be any breach of Article 6. It also seems to me that, even if PACE were applicable, it is most unlikely that a court or tribunal would rule inadmissible under s.76 or s.78 any statements made or documents produced as a result, at any rate in the absence of exceptional circumstances. On the other hand, it follows from this decision that a person made subject to a civil penalty under s.60(1) will be entitled to the minimum rights specifically provided for in Article 6(3). CONCLUSION

[85]For the reasons above stated, I would dismiss this appeal.

LORD JUSTICE MANCE:

[86]The preliminary issue before us is whether the imposition of penalty assessments on the respondent taxpayers under s.60 of the VAT Act 1994 amounted to criminal charges for the purposes of

Article 6 of the European Convention on Human Rights

. The VAT and Duties Tribunal was, by s.6(1) of the Human Rights Act 1998, required to act compatibly with the rights provided by Article 6, and so is this court. I have had the advantage of reading in draft the judgments of both Potter LJ and Sir Martin Nourse, who express opposing views as to the correct answer to the preliminary issue. For the same reasons as those given by Potter LJ, I consider that Mr Stephen Oliver QC, the Chairman of the VAT and Duties Tribunal, was correct in answering the issue affirmatively.

[87]Under s.2 of the Act the Tribunal and this court are not bound by, but are obliged to take into account the Strasbourg case law, when determining such an issue. The effect of the case law is in my view to point unequivocally towards the answer given by the Tribunal below and by Potter LJ in his judgment. I refer in particular to the cases of Öztürk (a case, like the present, of a domestically "de-criminalised" offence), Bendenoun , AP, MP and TP and Georgiou , cited more fully in the judgment of Potter LJ. While I appreciate that there are contrary arguments which might have found favour in the Strasbourg Court, and did find favour in some minority judgments there, I do not consider that it is appropriate now to place this country's jurisprudence out on a limb in an area where the Strasbourg Court has sought explicitly to develop an autonomous international test.

[88]The classification of a case as criminal for the purposes of

Article 6(3) of the Convention

on Human Rights, using the tests established by the Strasbourg jurisprudence, is a classification for the purposes of the Convention only. It entitles the defendant to the safeguards provided expressly or by implication by that Article. It does not make the case criminal for all domestic purposes. In particular, it does not, necessarily, engage protections such as those provided by the Police and Criminal Evidence Act 1984. The submissions before us did not address this point, or, indeed, the subject of burden of proof (although I note that no objection was even raised to a civil burden in Georgiou ). As Mr Stephen Oliver QC and Potter LJ have both observed, the precise implications under the Convention of classification of any case as criminal for the purposes of the Convention will have to be worked out on a case by case basis.

[89]The present decision might be thought to be detrimental to a sensible policy of decriminalisation - although any stigma which might attach to Convention criminality has evidently been outweighed in the respondent taxpayers' thinking by the perceived benefits of protections afforded during investigation and determination of any claims to penalties. I think that it is perhaps unfortunate that the case law cited to us does not enable, and the present preliminary issue does not allow, any more detailed analysis or conclusions with respect to the effects of treating the present offences as criminal for Convention purposes. But I remain to be convinced that our decision will seriously undermine or disrupt the general nature of existing procedures.

[90]I agree accordingly that the appeal should be dismissed. SIR MARTIN NOURSE:

[91]The function of the Commissioners of Customs and Excise, like that of the Commissioners of Inland Revenue, is the assessment and collection of revenues due to the Crown. In the vast majority of cases they find that taxpayers co-operate with them in the performance of that function, if not with enthusiasm, at least candidly and promptly. In a minority of cases they encounter inefficiency, negligence, deliberate indifference or even fraudulent evasion. In such cases it becomes part of their function to enforce the payment of the unpaid tax. Only to that extent can they be said to be a law enforcement agency. Even then enforcement is, in reality, a part of the process of collection.

[92]Until 1985 the VAT offence code provided solely for criminal offences, both for regulatory matters and for fraud, though offences of alleged fraud were in the great bulk of cases dealt with by monetary settlement, not prosecution, by means of compounding. But in February 1983 there was submitted to the then Chancellor of the Exchequer the report of the Committee on Enforcement Powers of the Revenue Departments under the chairmanship of Lord Keith of Kinkel, a lord of appeal in ordinary. Chapter 18 of that report was entitled "The VAT offence code: the case for change", and it is from paragraph 18.2.1 that my summary of the position before 1985 is taken. It continued:- "These arrangements stand in contrast to those of the Inland Revenue side, where civil penalties are provided both for regulatory matters and for a wide range of offences such as neglect and fraud on proof to the civil standard; and where criminal proceedings under the mainstream criminal law are taken only in respect of 'heinous' cases of fraud".

[93]In paragraphs 33 to 40 of his judgment Lord Justice Potter has dealt in greater detail with the VAT offence code before 1985 and set out or referred to the key passages in chapter 18 of the Keith report. Repetition is unnecessary. It is desirable only to emphasise two points and to make a third. First, the committee, having noted (paragraph 18.3.4) the strong feelings of some traders and representative bodies about VAT regulatory prosecution, recommended (paragraph 18.4.9) that the criminal sanction for regulatory matters in VAT should be abolished. Second, in paragraph 18.4.16 of the report the committee said:

"The investigation of acts of dishonesty in relation to tax matters in a 'civil' style, reinforced by inducements, rather than as criminal offences under the Judges' Rules was generally welcome to our witnesses and we heard no consistent body of criticism of the lower civil burden of proof in such cases as being unfair to the taxpayer."

Third, the Keith Report was evidently the product of a full and careful investigation into the system of enforcing the payment of unpaid tax conducted by a committee whose abilities and combined experience well fitted them to undertake that task.

[94]The statutory provisions enacted pursuant to the recommendations of the Keith Committee are now found in the Value Added Tax Act 1994 ("VATA") in relation to VAT and in the Finance Act 1994 in relation to excise duty. As Lord Justice Potter has explained, it is only necessary to refer to VATA, the material provisions of which are fully set out in his judgment. The most important of them are sections 60(1) and 72(1). Section 60 is headed "VAT evasion: conduct involving dishonesty". So far as material, subsection (1) provides:

"In any case where (a) for the purpose of evading VAT a person does any act or omits to take any action, and (b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability), he shall be liable . . . . . to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct."

[95]Section 72 is headed "Offences". Subsection (1) provides:

"If any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person, he shall be liable (a) on summary conviction, to a penalty of the statutory maximum or of three times the amount of the VAT, whichever is the greater, or to imprisonment for a term not exceeding 6 months or to both; or (b) on conviction on indictment, to a penalty of any amount or to imprisonment for a term not exceeding 7 years or to both."

[96]It is to be observed that liability to a penalty under section 60(1) depends on conduct, for the purpose of evading VAT, involving dishonesty, whether or not the conduct is such as to give rise to criminal liability. Under section 72(1) criminal liability depends on a person being knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by himself or any other person. The wording of these two provisions shows that Parliament contemplated the possibility of a person's conducting himself dishonestly for the purpose of evading VAT, but without being guilty of the fraudulent evasion of VAT. Although counsel on both sides were unable to suggest hypothetical facts which would establish liability under section 60(1) but fall short of establishing it under section 72(1), it would be most unwise to assume that there could not be conduct, for example deliberate indifference, where that would turn out to be the case.

[97]In paragraphs 44 to 49 of his judgment Lord Justice Potter has given a detailed account of the Commissioners' practice in administering the post-1985 enforcement code. Of particular importance is the inducement procedure explained in paragraph 45. In essence, that is a procedure which, by offering the taxpayer reductions in the penalty, enlists his co-operation in the assessment and collection of the tax due. Thus it exemplifies the true function of the Commissioners, demonstrating that the punishment of dishonest taxpayers is subsidiary to it.

[98]It is against this background that we must decide the question whether the imposition of penalties pursuant to section 60(1) of VATA (equally pursuant to section 8(1) of the Finance Act 1994) gives rise to criminal charges within the meaning of

Article 6(1) of the European Convention

of Human Rights which, so far as material, provides:

"In the determination of his civil rights and obligations or any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law..."

Implicit in the right to a fair trial, so the Strasbourg court has held, are rights to disclosure and to silence and a privilege against self-incrimination.

[99]In deciding the question we must apply the Human Rights Act 1998, for whose purposes Article 6 is one of "the Convention rights"; see section 1(1)(a). So far as material, section 2(1) provides:

"A court or tribunal determining a question which has arisen in connection with a Convention right must take into account any (a) judgment, decision, declaration or advisory opinion of the European Court of Human Rights . . ."

Reference has also been made to section 3(1), which provides that, so far as possible, primary and subordinate legislation must be read and given effect in a way which is compatible with the Convention rights. However, since no question on the meaning of the United Kingdom legislation has arisen, that provision would seem to have no application to this case.

[100]We are required to take into account the decisions of the Strasbourg court. We cannot make our own decision without doing so and, in taking them into account, we must give them due weight, even though the doctrine of stare decisis does not apply. But it is important to emphasise that that doctrine is inapplicable, not only between decisions of the Strasbourg court and those of our own courts, but also between decisions of the Strasbourg court themselves. While a line of Strasbourg decisions may, as they have in defining a "criminal charge" for the purposes of Article 6(1), evince a current of opinion as to the relative importance of the criteria to be taken into account, allowance must always be made for cases where reason and common sense demand that it should be re-examined.

[101]All the Strasbourg decisions from Engel v. Netherlands (1979-80) 1 EHRR 647 to AP, MP and TP v. Switzerland

(1998) 26 EHRR 541

hold that three criteria are to be taken into account in determining whether a criminal charge has been imposed by a Contracting State. They are, first, the classification of the proceedings in domestic law; second, the nature of the offence; third, the nature and degree of severity of the penalty that can be imposed. While it is said that these criteria are not in practice treated as analytically distinct or as a three stage test but as factors to be weighed together, the more recent decisions demonstrate a tendency to reduce the first of them to a position of relative unimportance, even to a point where it seems to have been paid no more than lip service. The reason for this, as it appears, is the tension between the classification of the proceedings in the domestic law of the Contracting State and the "autonomous Convention meaning" which the Strasbourg court has held must be given to the expression "criminal charge"; see e.g. Adolph v. Austria

(1982) 4 EHRR 313

, 322.

[102]In a number of respects the key decision for our purposes is Öztürk v. Germany

(1984) 6 EHRR 409

, where it was held that the imposition of a penalty for a minor traffic offence which the German legislature had removed from the sphere of the criminal law and had reclassified as a regulatory offence was nevertheless a criminal charge for the purposes of Article 6(1). In giving judgment, the court, after reaffirming the autonomous Convention meaning of the expression "criminal charge" and the three criteria to be taken into account, acknowledged it to be clear that the offence in question had been removed from the sphere of the criminal law by the German legislation. The judgment continues, at p. 422:

"[51.] Whilst the Court thus accepts the Government's arguments on this point, it has nonetheless not lost sight of the fact that no absolute partition separates German criminal law from the law on 'regulatory offences', in particular where there exists a close connection between a criminal offence and a 'regulatory offence'. Nor has the Court overlooked that the provisions of the ordinary law governing criminal procedure apply by analogy to 'regulatory' proceedings, notably in relation to the judicial stage, if any, of such proceedings. [52.] In any event the indications furnished by the domestic law of the respondent State have only a relative value. The second criterion stated above - the very nature of the offence, considered also in relation to the nature of the corresponding penalty - represents a factor of appreciation of greater weight."

The court went on to hold that the nature of the offence and the penalty that could be imposed (a regulatory fine which, though less burdensome than a penal fine, had retained a punitive character) were such as to render the imposition of the penalty a criminal charge.

[103]It appears that Öztürk is the only case in which the Strasbourg court has had to consider the imposition of penalties for offences which a Contracting State has removed from the sphere of the criminal law. In paragraph 49 of the judgment, at p. 420, the court said:

"The Convention is not opposed to States, in the performance of their task as guardians of the public interest, both creating or maintaining a distinction between different categories of offences for the purposes of their domestic law and drawing the dividing line, but it does not follow that the classification thus made by the States is decisive for the purposes of the Convention. By removing certain forms of conduct from the category of criminal offences under domestic law, the law-maker may be able to serve the interests of the individual as well as the needs of the proper administration of justice, in particular in so far as the judicial authorities are thereby relieved of the task of prosecuting and punishing contraventions - which are numerous but of minor importance - of road traffic rules. The Convention is not opposed to the moves towards 'decriminalisation' which are taking place - in extremely varied forms - in the member States of the Council of Europe. The Government quite rightly insisted on this point. Nevertheless, if the Contracting States were able at their discretion, by classifying an offence as 'regulatory' instead of criminal, to exclude the operation of the fundamental clauses of Articles 6 and 7, the application of those provisions would be subordinated to their sovereign will. A latitude extending thus far might lead to results incompatible with the object and purpose of the Convention."

[104]Although the decision in Öztürk went the other way and despite the observations I have quoted from paragraph 52 of the judgment, it is natural to assume that the court's acknowledgement, in paragraph 49, that the Convention is not opposed to moves towards decriminalisation was intended to allow for some flexibility in the importance to be attached to the first of the three criteria. It is notable that in his dissenting opinion

Judge Bernhardt said, at pp. 437-438:

"I agree with the present judgment and the settled case law of this Court that the qualification of certain notions and procedures under national law cannot be the final word. The autonomy of the Convention and its provisions excludes any unilateral qualification which cannot be reviewed. But this does not mean that the national qualification is without any importance. We are here concerned with the difficult and precarious task of drawing the border-line between the qualification by the national legal system and the national margin of appreciation, on the one hand, and the autonomy of the Convention provisions, on the other."

The value of those general observations is not diminished by their having been expressed in a dissenting opinion. I would add that, even if the doctrine of stare decisis had been applicable, Öztürk would plainly have been distinguishable from the present case.

[105]The respondents have relied on other decisions of the Strasbourg court, in particular on Bendenoun v. France

(1994) 18 EHRR 54

. They have been considered in the judgment of Lord Justice Potter. With one exception, they do not require further reference. Amongst other things, they hold that a penalty intended not to compensate for damage, but to punish and deter, is characteristic of a criminal charge and, further, that it is unnecessary for the penalties available to include deprivation of liberty. The exception is Georgiou v. United Kingdom

[2001] STC 80

, which the Chairman of the VAT and Duties Tribunal, Mr Stephen Oliver QC, said was directly in point. That is correct insofar as it was a decision under what is now section 60(1) of VATA. However, the court did not have the benefit of the full and careful arguments that we have heard from Mr Kenneth Parker QC, for the Commissioners, and Miss Eleanor Sharpston QC, for the respondents, and, in regard to the first criterion, it simply noted that the proceedings were classified as civil, rather than criminal, in our domestic law. In my view Georgiou is not a decision to which, for present purposes, weight need be given.

[106]I turn to consider the penalties imposed by section 60(1) of VATA in relation to each of the three criteria.(1) The classification of the proceedings in United Kingdom law The penalties are expressed to be civil in nature and their imposition is subject to an automatic right of appeal to a civil tribunal whose proceedings are governed by the VAT Tribunals Rules 1986. The introduction of section 60(1) was part of a deliberate and carefully considered decriminalisation of all regulatory and some more serious VAT offences. The more serious offences were not wholly decriminalised. Fraudulent evasion of VAT remains a criminal offence. The practice, now well-established, of the Commissioners in imposing penalties under section 60(1), in particular the inducement procedure, is part and parcel of their function of assessing and collecting revenues due to the Crown. The punitive and deterrent effect of the penalty system is subsidiary thereto. The system is fair, beneficial to the taxpayer and in the public interest. The imposition of a penalty does not give the taxpayer a criminal record.

(2) The nature of the offence

[107]On behalf of the Commissioners Mr Parker accepted that there are certain features of the penalties which the Strasbourg decisions have identified as showing that their imposition gives rise to a criminal charge. First, they apply in principle to all citizens qua taxpayers, not just to a limited class. Second, the function of the penalties is not to compensate for the tax unpaid but to punish and deter dishonest taxpayers. Third, the imposition of the penalties requires a finding of dishonesty. While it is true that weight has been given to these features by the Strasbourg decisions, the second of them entails a very superficial view of the present case. Though the penalties are punitive and deterrent in the sense that they are not compensatory, they have the more profound and realistic function of assisting the collection of unpaid tax. (3) The nature and the degree of severity of the penalty

[108]No sentence of imprisonment can be imposed under section 60(1). The maximum penalty is the amount of the VAT evaded or sought to be evaded. But it is subject to reduction by means of the inducement procedure. In the cases before the court there have been reductions of 10 per cent in two of them and of 50 per cent in the third. While a reduction of, say, 50 per cent in a case where the amount of the tax evaded is large will still result in a penalty of considerable amount, it can hardly be said to be disproportionate to the amount of the tax evaded.

[109]What ought to be the approach of an English court to the question we have to decide? In relation to the second and third criteria the penalties are not so serious as to require their imposition to be treated, without more, as a criminal charge. Everything seems to depend on whether it is open to us to attribute a greater importance to the first criterion than has been the tendency of the more recent Strasbourg decisions. In my judgment it is. We were consistently told by those who advocated the incorporation of the Convention in our law that it would enable our courts to make a beneficial contribution to its jurisprudence. In my opinion that contribution ought to start with a recognition of the widely differing traditions and institutions of the community States. What ought to be treated as a criminal charge in some of them may not need to be so treated in others. In this country we have, since 1689, developed a system of civil administration in which the executive, being subject to review by the courts, acts responsibly and fairly towards the individual citizen, the protection of whose rights is an integral part of the system.

[110]The assessment and collection of revenues due to the Crown is an important part of our civil administration. The VAT penalty system is fair, beneficial to the taxpayer and in the public interest. The rights of the taxpayer are already adequately protected. It would be folly, in the name of an abstraction, to introduce a further unnecessary protection, whose practical consequence would be to impair the efficiency of the system at no advantage to the taxpayer. For my part, I decline to do so.

[111]I would allow the appeal and make whatever declaration is appropriate to reflect the view I have expressed.

ORDER

Appellant to pay respondent's costs of the appeal and application; detailed assessment; permission to appeal to the House of Lords granted on the undertaking of the commissioners to fund the petition to the House of Lords and not to seek those costs from the other side. Applications (x2) allowed. (Order does not form part of approved Judgment)

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