Tax Break?

It was the key tax case of the year. Jon Robins reports on how a Chinese takeaway defied Customs & Excise

Earlier this month the Court of Appeal ruled that Customs & Excise officers had breached the human rights of two non-English-speaking proprietors of a Chinese takeaway – the Murdishaw Supper Bar in Cheshire – over the non-payment of a VAT bill.
“This case could open the floodgates to appeals in hundreds of past cases where there was no recourse to interpreters and inadequate information regarding the nature of the alleged offence,” predicts Michael Bailey, a partner at accountancy firm PricewaterhouseCoopers (PwC), which represented the two.
Customs & Excise had imposed a £67,000 civil penalty on the two Cantonese speakers, Geong Kwan Han and David Yau, who argued that they were deprived of the rights they might have been afforded in a criminal action. Their case was one of three appeals considered by the courts in Han & Yau Commissioners of Customs & Excise.
Bailey predicts a “fundamental change” in English law. “We have been able to argue that anyone charged with tax evasion or similar tax offences 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,” he says.
Since the mid-1980s, Customs & Excise has been able to offer a reduced civil penalty, as opposed to a criminal sanction, if parties cooperate with an investigation. The level of the penalty is reduced in line with the degree of cooperation offered by the parties. In the Han and Yau case, the defendants were offered a 10 per cent reduction for 'partial assistance'.
Such civil proceedings have the advantage of sparing parties a criminal record and ultimately jail; but, as was argued in the Court of Appeal, they lack the protections offered to defendants in criminal cases. It was argued successfully that the imposition of a penalty amounted to a criminal procedure and consequently the defendants should have been afforded the same rights as someone charged with a criminal offence under Article 6 of the European Convention on Human Rights (ECHR), the right to a fair and public hearing.
It was a point made forcibly in Han & Yau, as neither party could hold a fluent conversation in English, let alone understand the mysteries of the tax system. Barrister Andrew Young is employed by PwC and acted on behalf of the defendants at both the tribunal and before the Court of Appeal. He believes that the predicament of Han and Yau is far from rare. “If one analyses the last three years of appeals before the VAT and Duties Tribunal against civil proceedings and looks at the names, one finds that the majority are non-Anglo-Saxon.”
The owners of high street takeaways are not the typical clients of accountancy giant PwC. Young came across Han and Yau when representing another client at a VAT and Duties Tribunal in Manchester. He ended up representing the two restaurateurs because he was eager to have his own client before the tribunal as soon as possible, and they were due to appear before him without a lawyer. “But it also meant that I'd make out their application properly,” he adds.
However, it soon became apparent that the lawyer could not communicate with his new clients. One could not speak any English at all and the other had only the most rudimentary grasp of the language. “But even with a limited amount of English, tax points are complicated and people don't understand what's going on,” Young says. “In this case, Customs & Excise had inferred dishonesty and how on earth they'd managed to do that I really don't know.”
According to the lawyer, the case also highlights another worrying aspect of such tax investigations – the inequality of arms that often frequently exists between state and tax-payer. “If you take a situation where you have two unemployed Chinese waiters – because that was the reality of the situation – how can they afford to stand up to counsel instructed on behalf of the commissioners?” he asks. In the case of Han and Yau, the commissioners for Customs & Excise retained leading and junior counsel, whereas the two men had no representation in the early stages of the case.
“There are lots of people who have linguistic difficulties and little funding going against the full might of state,” argues Young. “That situation has caused the most tremendous inequality of arms. It's unfair, and it's been unfair for a very long time.”
It has been a human rights challenge waiting to happen, reckons Greg Sinfield, a tax partner at Lovells. “As soon as the act was introduced last year, the tax journals and conferences were awash with people speculating as to what the impact of the act might be, and this was the most obvious,” he says.
In fact, the first such challenge came on 3 October, only days into the new human rights regime. Perhaps as an indication of the importance attached to Han & Yau, the case made the journey from tribunal to Court of Appeal in only five months. “I've never seen a case move so quickly,” says one tax lawyer. Another believes that more than 100 cases were stalled to wait on this month's judgment.
“I've had clients who've been investigated by Customs in connection with penalties, where it appears that the safeguards that are provided in relation to criminal matters have not been present,” acknowledges Sinfield. “It may have placed my clients in a worse position than they should have been placed in.”
While many tax law practitioners welcome the enforcement of the rights of tax-payers, at the same time they fear that this month's ruling might force Customs & Excise to pursue more criminal prosecutions. “It's good that people who are subject to investigations by the tax authorities are given the same protection as those subject to criminal investigation,” says Sarah Gabriel, a partner at white collar crime practice Peters & Peters. “But we'll have to see how it works out in practice, because it would be unfortunate if it undermined the civil system.”
Maurice Martin, senior partner at London practice Tarlo Lyons, compares the civil penalty regime used by Customs & Excise with the approach taken by the Inland Revenue. The Inland Revenue has adopted the 'Hansard procedure' since at least 1944, so-called because of a question raised in Parliament about the Inland Revenue's policy on the exercise of civil or criminal sanctions.
“The answer given by the Government was that the Inland Revenue has its own discretion, but if there's been a full disclosure and the tax-payer wants to make a full confession, they may go down a civil route,” explains Martin. “In practice, where they give you the Hansard procedure, they never prosecute. It's an unwritten rule.”
Over the past year, Customs & Excise has been piloting its own version of the Hansard procedure. Of course, for practitioners and tax-payers alike, a civil settlement will always be a better option than – as Martin points out – “running the risk of being taken to court, prosecuted and going to prison”.
He continues: “The worry about the Han and Yau case is that they may cause doubt to the tax authorities as to whether they should continue these procedures. They could end up being counter-productive, because if the authorities perceive difficulties in the civil route, they might decide to take more criminal proceedings.”
Sidney Myers, a litigation partner at Allen & Overy who specialises in tax and regulatory disputes, believes that Han & Yau has a potential impact beyond the world of tax. As he points out, a civil matter under English law can be deemed criminal for the purposes of the ECHR, as incorporated into domestic law by the Human Rights Act 1998.
“Tax penalties are but one species of proceedings that don't fit neatly into the criminal/civil divide,” he argues, before citing as an example proceedings that will be undertaken by the new Financial Services Authority (FSA). He also cites the new controversial offence of market abuse under the Financial Services and Markets Act, which could land someone with an unlimited fine if they make a misleading statement about a company's business or the value of its shares. It was argued in Parliament that market abuse was criminal for ECHR purposes. “But the Government and the treasury disagreed and a compromise was agreed in the act where market abuse had some additional safeguards; but they're limited,” says Myers.
Myers welcomes the judgment. “Personally, I think that it's only right that people who don't speak good English should have a proper interpreter,” he says. However, he believes that the 2:1 split in the Court of Appeal is revealing of the court's ambivalence to the Human Rights Act. In particular, he flags up the dissenting comments of the retired judge Sir Martin Nourse.
“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,” said Nourse. “In my opinion, that contribution ought to start with a recognition of the widely differing traditions and institutions of the community states.”
“If you look at the ruling, you see a reluctant judgment,” notes Young, who also picks up on the dissenting comments. But he contends that the civil penalties flow from a European directive on VAT and consequently the principles of European law should be applied.
“The judges have tried to do as little violence as they can to the existing status quo,” says Young. “But the problem is that you cannot dilute some of these principles. They won't go away.”

A victory for employed barristers?
The Bar Council's rules on non-practising barristers (NPBs) caused extra problems in the case of Han & Yau Commissioners of Customs & Excise.

"Absolutely ludicrous" is the frank assessment of barrister Andrew Young of the regulations. Introduced last year, the regulations mean that many NPBs will no longer be able to call themselves a barrister. Young, formerly of Deloitte & Touche, is employed by PricewaterhouseCoopers.

NPBs are distinguished from employed barristers because they can advise both their employers and their employers' clients, while employed barristers can advise only the former. Some NPBs will retain their professional title until July 2005, but only if they were registered as NPBs before last July's deadline. The remainder have had to remove the word 'barrister' from their job description. They must now call themselves something else, such as legal adviser.

"Under Article 6 of the ECHR [European Convention on Human Rights], anybody charged with a crime has a right to be represented by a person of their choosing, and my clients chose me," explains the barrister. Young applied to the Bar Council for a waiver, which would allow him to represent his clients. He was supported by John Morgan in his application, who represents NPBs on the council.

His clients ended up instructing Eleanor Sharpston QC of 4 Paper Buildings. "I'm qualified, capable and competent, and on these matters I know as much as anyone," says Young. Ultimately, Young was allowed to represent Han and Yau, making him the first barrister employed by an accountancy firm to be granted a right of audience to represent their client in the Court of Appeal.

At the council's recent annual conference, Young recounted another experience before the VAT and Duties Tribunal, where the chairman referred to Young as 'counsel'. He had to point out that, under instructions from the Bar Council, he was not allowed to describe himself as counsel, barrister or employed barrister.

Young says: 'I'm allowed to set myself up in the high street of Ascot as a butcher and call myself a practising barrister and sell meat, but what I'm not allowed to do is tell anyone to whom I provide legal services that I'm a barrister."

Following Young's contribution, a barrister explained to the conference that, as he was speaking on a Saturday, perhaps he ought to introduce himself to delegates as "a practising non-practising Jew".

The 'barrister' is considering bringing an action against the Bar Council "as a matter of principle", to assert the right of NPBs to call themselves barristers. "The Bar Council is treating a lot of people unfairly; it's absolutely wrong, and I don't know anyone who actually agrees with it," says Young.