CEP3500 - Civil evasion penalties for Customs, Excise and VAT: proving dishonest conduct

Burden of proof

The burden of proof of liability to a civil evasion penalty lies with the Commissioners.

The burden of proof in respect of all other matters, including mitigation of the penalty is with the person. If an appellant offers evidence to show that a larger reduction should have been made to mitigate the penalty, it is then for the Commissioners to satisfy the tribunal that the evidence does not warrant the further reduction claimed. It is therefore important that the discretion to mitigate is exercised correctly.

Standard of proof

The standard of proof required in civil cases is based on a balance of probabilities.

Legal advice is that in the more serious civil cases the nature, quality and weight of evidence to satisfy the civil standard of proof (i.e. tip the balance of probabilities) is commensurably increased. Amongst these more serious cases are those where dishonesty has to be proved. Extra evidential ingredients are then required to tip the balance of probabilities because an act involving dishonesty will, in the nature of things, be improbable of a normal person.

Dishonesty vs Negligence in VAT cases

Where the behaviour has been determined as negligent in a direct tax case, we are not able to support a VAT civil evasion penalty for dishonest conduct where the evidence relied upon is the same.

Proving dishonesty

What is meant by dishonest conduct

Dishonest conduct happens when a person does something or fails to do something in a way that would be regarded as dishonest according to the ordinary standards of reasonable and honest people.

‘Dishonesty’ should be given its ordinary English meaning, namely ‘not honest, trustworthy, or sincere’ (R v. Ghosh [1982] 1 QB 1053).

In Barlow Clowes International Limited (in liquidation) and others v Eurotrust International Limited [2005] UKPC 37 the Privy Council clarified that the House of Lords judgment in Twinsectra Ltd v Yardley [2002] 2 AC 164 should not be interpreted as requiring the defendant to be conscious of his wrongdoing; rather Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 represented the correct approach. Their Lordships explained:

“…although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards. The Court of Appeal held this to be a correct statement of the law and their Lordships agree.”

In Abou-Ramah v Abacha [2006] EWCA Civ 1492 Arden LJ also endorsed the above and confirmed that Barlow Clowes clarified Twinsectra Ltd. Arden LJ further explained that the subjective is not entirely irrelevant:

“On the basis of this interpretation, the test of dishonesty is predominantly objective: did the conduct of the defendant fall below the normally acceptable standard? But there are also subjective aspects of dishonesty. As Lord Nicholls said in the Royal Brunei case, honesty has ‘a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.’”

At [68(iv)] Arden LJ said that in the context of civil liability there is no overriding reason why in respect of dishonesty the law should take account of the defendant’s views as to the morality of his actions.

We consider that the case law discussed above has superseded the more subjective approach set out in R v Ghosh [1982] 1 QB 1053 in the context of Civil Evasion Penalties. Following cases such as Barlow Clowes, it is not a requirement of the standard of dishonesty that the defendant should be conscious that his actions were wrong. It is sufficient that he personally knows the background facts which made his conduct dishonest by the ordinary standards of reasonable and honest people. Officers should still wherever possible seek to obtain evidence which establishes the person’s knowledge and understanding of his actions (or inactions) and their implications as this will help us to take cases successfully through the Tribunal. The person’s conduct more generally is also likely to be relevant for the quantum of the penalty.