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HMRC internal manual

VAT Civil Evasion Penalty

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HM Revenue & Customs
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Assessment and notification of VAT civil evasion penalty: time limits for assessment and notification of penalties

Time limits for S60 penalties

The making of civil evasion penalty assessments is subject to strict legal time limits set out in Sections 77(1)(a) and 77(2), 77(4) and 77(5) of the VAT Act 1994. The making of a civil evasion penalty assessment is subject to two time limits - the time limit within which the assessment must be made and the time constraint on how far back the assessment can extend.

The assessment must be made within the later of the time limits set out in 77(1)(a), S77(4) and S77(2):

  1. Under S77(1)(a) an assessment for a penalty shall not be made more than four years after the end of the prescribed accounting period or importation or acquisition concerned.
  2. If VAT has been lost as a result of dishonest conduct falling within Section 60(1), Section 77(4) of the VATA 1994 extends the time limit for making a penalty assessment to 20 years after the end of the prescribed accounting period in which the VAT was lost, subject to 77(5) (see 4 below).
  3. Under Section 77(2) of the VATA 1994 a civil evasion penalty assessment must be made at any time before the expiry of the period of two years beginning with the time when the amount of VAT due for the prescribed accounting period concerned has been finally determined, subject to S77(5) (see 4 below).

The tax in a period is finally determined on the later of:

  • the date of receipt of a return
  • the date of issue of the VAT655 (notification of an officer’s assessment
  • the date of any valid amendment to that officer’s assessment
  • the date of issue of a VAT657 (notification of voluntary disclosure)
  • the date of any Section 85 agreement
  • the date an appeal is withdrawn, or
  • the date of release of a tribunal decision or a judgement of the court being delivered, this includes cases where the amount of the tax assessment is upheld as originally issued.
  1. Section 77(5) limits the 20 year rule in Section 77(4) and the two year rule in S77(2) to three years after a person’s death. Where S77(4) applies a penalty assessment which could have been immediately after a person’s death can be made at any time within three years after the death. However, it is HMRC’s policy not to issue VAT civil evasion penalties against deceased persons.

Whilst the above time limits set out in Section 77 aforementioned appear to allow officers potentially quite a lengthy period of time to raise an assessment for a civil evasion penalty, this has to be set in the context of the Court of Appeal ruling in Han & Yau v Commissioners of Customs & Excise (2001) that: the civil evasion penalty is to be classified as equivalent to a criminal matter for the purposes of Article 6 of the European Convention on Human Rights (ECHR).

Article 6 (1) ECHR: Everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.

The rights afforded by Article 6(1) apply at the point a ‘criminal charge’ is made against someone. In the normal run of cases the penalty assessment will constitute the charge.

It was established in the case of Eckle v Germany (1982): A ‘Charge’, for the purposes of Article 6(1), may be defined as: ‘the official notification given to an individual by the competent authority of an allegation that he has committed a criminal offence,’ a definition that also corresponds to the test whether ‘the situation of the [suspect] has been substantially affected’.

The House of Lords has held (Attorney General’s Reference No. 2 of 2001 [2004] ), following the definition given above in Eckle that in England and Wales formal charge or summons, rather than arrest or interview under caution, will normally be the significant point in time for the purposes of Article 6. However this is not a fixed rule, it will depend on the circumstances of the case. The House of Lords was influenced in its view by the fact that Code C, made pursuant to S.66 of the Police and Criminal Evidence Act, requires a detained person to be charged as soon as there is sufficient evidence to justify it. There is no question, if the Code is observed, of there being an improper delay between arrest and charge.

The civil evasion procedures do not involve arrest or interview under formal caution. Those under suspicion may be aware (often are aware) that the Commissioners have concerns about the accuracy of tax claims/declarations. They may be invited to answer questions. They may eventually be invited to make admissions and cooperate further in the investigation with a view to reducing their liability to a penalty.

In the case of King v United Kingdom (2004) which concerned a civil investigation of suspected tax irregularities it was established that proceedings can be said to start when official notification is given to an individual by the competent authority that there are reasonable grounds to suspect an offence. This would be at the point the applicant is handed, for example, Code of Practice 9 (2005) ‘Civil investigation into cases of suspected fraud’, as they are told at this point that HMRC is investigating them in relation to a suspected fraud. Even though the applicant may not have been formally charged with a specific offence (that is, no penalty notice raised), the applicant may claim to have been put on formal notice that he is at risk of serious consequences. Therefore the rights that would apply between (for example) the point of arrest and the point of charge are brought into play by the issue of the Code of Practice, though the point of charge would be when the penalty notice is issued.

When determining the duration of an undue delay in having a matter heard, generally, there is no fixed period of time beyond which a delay becomes unreasonable. The European Court of Human Rights in cases such as H v United Kingdom (1987) have repeatedly endorsed the following formula to be applied in determining whether the time taken by the proceedings was reasonable:

  • *‘the reasonableness of the length of proceedings must be assessed in the light of the circumstances of the case and with reference to the following criteria: the complexity of the case, the conduct of the applicants and the relevant authorities and what was at stake for the applicants in the dispute’ *
  • In the case of K H MU & C B MU v Customs & Excise [2001] VTD 17504 a 20 month delay between the issue of an assessment for tax arrears and the issue of an assessment for the civil evasion penalty was deemed acceptable. The delay represented legitimate time taken to investigate whether tax arrears uncovered were due to dishonest behaviour.

Time limits for issuing S61 notices

The issuing of S61 notices is subject to time limits set out in S771(b) of the VAT Act 1994.

A S61 notice must not be issued more than four years after the making of a civil evasion penalty assessment.