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HMRC internal manual

VAT Civil Evasion Penalty

HM Revenue & Customs
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Liability to a VAT civil evasion penalty: proving dishonesty

Dishonesty vs Negligence

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 demonstrating the behaviours is the same.

Dishonesty and deliberate behaviour, with or without concealment, are all manifestations of fraud or fraudulent conduct, whereas negligence is seen as careless.

Proving dishonesty

The Tribunal in Ghandi Tandoori Restaurant (1989) VATTR 39 considered the meaning of the word ‘dishonesty’.

“It seems to us clear that in such a context, where a person has, ex hypothesi, done, or omitted to do, something with the intention of evading tax, then by adding that the conduct must involve dishonesty before the penalty is to attach, Parliament must have intended to add a further element in addition to the mental element of intending to evade tax. We think that that element can only be that when he did, or omitted to do, the act with the intention of evading tax, he knew that according to the ordinary standards of reasonable and honest people that what he was doing would be regarded as dishonest.”

Dishonesty in this context follows the guidance given by the Court of Appeal in R v. Ghosh [1982] 1 QB 1053, CA, where a two-step test for showing dishonesty was set out:

“In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. . . If it was dishonest by those standards then the jury must consider whether the defendant himself must have realised that was he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly. It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did. For example, Robin Hood or those ardent anti-vivisectionists who remove animals from vivisection laboratories are acting dishonestly, even though they may consider themselves to be morally justified in doing what they do, because they know that ordinary people would consider these actions to be dishonest.”

‘Dishonest’ should be given its ordinary English meaning, namely ‘not honest, trustworthy, or sincere’.

Solicitors’ Office advice is that the correct test for establishing dishonesty as stated in the High Court case of Sahib Restaurant v HM Revenue & Customs (February 2008 - unreported) is found in the case of Barlow Clowes International Limited (in liquidation) and others v Eurotrust International Limited and others [2005] UKPC 37. In this case it was held that the test laid down in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 was the correct test and was summarised as follows:

“…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.”

Officers should seek to obtain evidence which establishes the trader’s knowledge and understanding of his actions (or inactions) and their implications. It is essential to find out not only what the trader’s normal accounting system is, but also to establish that the trader fully understands how and when the VAT is accounted for. If this can be established, the failure to pay the correct amount of VAT can be put to the trader to help ascertain the state of mind when for example; a false return was made.