Omagh: tax penalty was a "criminal charge" for the purposes of Article 6 of the ECHR

In Omagh Minerals Ltd v HMRC [2018] UKFTT 697 (TC), the First-tier Tribunal (FTT)  held that despite the civil nature of the underlying tax dispute, an aggregates levy penalty imposed on the taxpayer by HMRC was a "criminal charge" to which Article 6 of the European Convention on Human Rights (ECHR) applied.

Background

Omagh Minerals Ltd (the taxpayer) operated an opencast gold mine. The dispute involved whether the rock removed from the mine contained minerals and materials which were exempt from aggregates levy under section 17(4), Finance Act 2001 (FA 2011). HMRC issued an assessment to tax based on the non-applicability of the exemption and imposed a penalty of £15,214 for the underpayment of aggregates levy under paragraph 9, Schedule 6, FA 2001.

The taxpayer appealed the assessment and the penalty to the FTT.

The parties asked the FTT to consider, as a preliminary issue, whether the proceedings constituted proceedings of a criminal nature such that the provisions of Article 6 (right to a fair trial), ECHR, applied.

The FTT considered the following:

1. whether the assessment and the penalty, each viewed alone, were a criminal charge; and,
2. if the assessment and/or the penalty was a criminal charge, were the entire proceedings criminal in nature?

Taxpayer's position

The taxpayer argued that the penalty was a criminal charge, resulting in Article 6 applying to the entire proceedings. It relied on the criteria set out in Engel and others v The Netherlands (No 1) (1976) 1 EHRR 647 (the Engel criteria), namely: i) the classification of the proceedings by the domestic state; ii) the nature of the offence; and, iii) the character of the penalty to which the proceedings may give rise.

As a matter of domestic law, the taxpayer accepted that the penalty was not criminal, but highlighted that i) was not determinative and argued that, applying criteria ii) and iii), the penalty was clearly intended to be a deterrent and punitive in nature. Additionally, the penalty was significant in sum and the appeal was progressing pursuant to hardship provisions, so it was clearly severe. As such, the penalty was subject to Article 6.

Relying on Jussila v Finland [2007] 45 EHRR 39, the taxpayer contended that as the penalty was a criminal charge, the entire proceedings were subject to Article 6. The liability to pay the assessment and the penalty was dependent on whether the rock removed was exempt from aggregates levy and as such Article 6 applied both to the assessment and the penalty.

HMRC's position

HMRC submitted that Article 6 was not engaged in relation to the assessment because it did not involve the "determination of … civil rights and obligations". Furthermore, regardless of any criminal charge analysis in relation to the penalty, the assessment itself could not be subject to Article 6 as it was independent of the penalty.

HMRC also applied the Engel criteria to analyse the penalty. It argued that under domestic law penalties issued under Part 2, Schedule 6, FA 2001, are civil penalties, and separate from the criminal sanctions contained within Part 1, Schedule 6, FA 2001. It was clearly the intention of parliament that Part 2 imposes civil penalties to which Article 6 does not apply.

In relation to Engel criteria ii) and iii), HMRC argued that the penalty was a preventative or regulatory measure and therefore it could not be said that the predominant purpose of the aggregates levy penalty legislation was punitive. Additionally, the sum of the penalty was fixed at a maximum of 5%, so the penalty did not rely on the degree of culpability of the taxpayer and was independent of any enquiry into criminal conduct. Accordingly, Article 6 was not engaged in relation to the penalty.

FTT decision

The FTT held that the assessment was not a criminal charge because it did not involve civil rights and obligations within Article 6. However, following the leading authority of Jussila, the penalty was a criminal charge and Article 6 was engaged.

The FTT confirmed that the Engel criteria is the correct approach to adopt when  assessing whether penalties are criminal charges which engage ECHR obligations. If, applying the Engel criteria, it is determined a penalty is a criminal charge, the fact that the penalty is small in amount is irrelevant.

The FTT said that although the penalty was clearly not a criminal charge under domestic law, Engel criteria i) was simply a starting point. Of more importance was that the purpose of the penalty was to deter taxpayers from under-declaring tax on their returns and to punish those that did so. The penalty was not compensatory in nature and the quantum of the penalty did not affect the nature of the penalty under Engel criteria ii). Furthermore, the FTT rejected HMRC's contention that the penalty was regulatory rather than criminal. The FTT did not consider it necessary to consider Engel criteria iii). 

Although the FTT considered the penalty to be a criminal charge, it concluded that the proceedings as a whole were not criminal in nature. The assessment was not affected by the penalty or conditional upon it and the assessment itself was not a criminal charge.  

The FTT noted that there may be situations where an assessment and penalty are so intimately linked that they cannot be separated and the consideration of criminal conduct must involve the consideration of the substantive tax appeal. However, this was not the case in the present case. The main issue was whether rock extracted from the gold mine was exempt from aggregates levy. The penalty was contingent on that substantive determination.

Accordingly, the taxpayer's Article 6 rights were only engaged in relation to the penalty appeal. Those rights did not extend to the substantive assessment appeal.

Comment

This decision confirms that when determining whether a taxpayer's Article 6 rights are engaged in relation to a penalty appeal, the correct approach is to apply the Engel criteria. If the penalty is correctly analysed as a criminal charge on the application of one of those criteria, the position is not altered by the fact that the penalty is small in amount.

Article 6 will only be engaged across the entire appeal proceedings if there is an incidence of liability whereby the substantive decision and the penalty decision are so intrinsically linked that they cannot be separated and the consideration of the criminal charge necessarily involves consideration of the substantive decision.