Analysis: Consequences of Han & Yau

The names of two Chinese restaurateurs are set to go down in tax folklore amid the conflict and confusion arising from the Human Rights Act.

And all eyes are now set on the Inland Revenue, who might be forced to radically alter its own tax investigation procedures as the implications of a VAT tribunal are fully digested.

In December last year, the Han & Yau case – or to give it its full title, Han & Yau, Martins & Martins, Morris v The Commissioners of Customs & Excise – was heard in the VAT and Duties Tribunal.

The defendants claimed their human rights had been violated by not being allowed a fair trial.

The tribunal agreed with the defendants, and now the principle could be applied to the Revenue’s ‘Hansard’ procedure for tax evasion, which seeks the co-operation of defendants but reserves the right to prosecute at a later stage.

When the Court of Appeal upheld the ruling last week, PricewaterhouseCoopers, which is acting for Han & Yau, was jubilant.

PwC successfully argued that Customs’ practice of treating tax evasion as a civil offence was in breach of the 1998 Human Rights Act.

The nub of the argument is that tax penalties imposed in such cases are criminal in nature and that defendants should have the same rights as those applied to criminal cases.

As Michael Bailey, a PricewaterhouseCoopers tax partner, says: ‘We have been able to argue that anyone charged with tax evasion…should have recourse to legal representation at the time of questioning, should be given the same protection as if they were tried in a criminal case, and have the right to a full and fair hearing.’

Tellingly, Bailey adds: ‘Customs has, in the past, induced people to admit dishonesty in the hope of receiving a reduced financial penalty rather than face a criminal prosecution.’

A crucial point is that defendants would be able to avoid self-incrimination. But some professionals believe this would have an adverse effect on the settling of claims.

Tom Murray, KPMG’s head of tax investigations, says: ‘Many tax settlements involving penalties are based on material provided voluntarily by the taxpayer as part of a well-established process leading to a financial settlement.’

‘If this is inadmissible as evidence because it is self-incriminatory it may both be very difficult for the tax authorities to bring penalty proceedings successfully and for advisers to advise on matters of disclosure and co-operation.’

The Appeal Court judgment acknowledges changes made in Customs’ procedures last December, where taxpayers are now notified that if they co-operate, Customs will not prosecute.

This then turns the spotlight on to the other tax collecting authority, the Inland Revenue.

In principle, the H&Y ruling should apply to the Revenue as well.

John Gwyer of PKF says: ‘Customs has seen the danger in Han & Yau and done something to correct it … but this raises the point: what about the Inland Revenue?’

Currently, when the Revenue introduces the so-called ‘Hansard’ procedure, it reserves the right to prosecute later if it so chooses, even if the taxpayer has already confessed.

‘In that situation, I think the taxpayers’ human rights are being infringed … taxpayers are being induced to confess but their fates are left open,’ says Gwyer.

Customs says it is considering the practical implications of the Appeal Court’s decision, and has not ruled out taking the case to the House of Lords.

But KPMG’s Murray is not convinced this will take the case any further.

‘If that merely results in another affirmation of the general principle (that substantial tax penalties can amount to criminal charges) it will add little value,’ he says.

The key point that Customs wants to stress is that most businesses, and indeed most of the tax profession, do not want the system changed.

Back in 1985 the Keith Report introduced a civil penalty regime, widely welcomed by tax professionals – Customs gets its money, taxpayers do not get a criminal record.

Is this about to be changed by Han & Yau?

PKF advises ‘pay up until case is settled’

Tax experts at PKF are advising that, until H&Y is resolved, penalties being sought in similar settlement situations should be either paid – or become payable – with the expression of reservation in the offer document. They add there may be the possibility of lodging a protective claim to the revenue departments in any situation where penalties were included in a negotiated settlement following a challenge without caution.


The full judgment can be read here

Judges throw tax cases into doubt.

Mixed reaction to Han & Yau result

Landmark Han & Yau VAT ruling given

Human rights force VAT probe rethink

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