Court of Appeal considers burden of proof in penalty appeals

In HMRC v Sintra Global Inc and another [2025] EWCA Civ 1661, the Court of Appeal (CofA) decided that taxpayers, not HMRC, must prove they are not liable to the underlying tax, when challenging penalties on that basis.

Background

Sintra Global Inc (Global), Sintra SA (SA) and Mr Parul Malde, were involved in the alcohol trade. 

HMRC argued that Global, SA and Mr Malde, were involved in the fraudulent diversion of alcohol into the UK from the EU between 2004 and 2014, making use of a process known as 'inward diversion fraud'. 

Following its enquiry, HMRC issued various decisions and penalties to Global, SA and Mr Malde, some of which did not proceed before the First-tier Tribunal (FTT) for determination. The appeals which proceeded before the FTT, and later the Upper Tribunal (UT) and CofA were the following:

a. A decision that Global was liable to be registered for VAT between 1 April 2012 and 30 June 2015 (the Decision). 

b. A registration penalty assessment issued to Global in the sum of approximately £8.7 million (the Penalty). 

c. Three personal liability notices issued to Mr Malde making him personally liable for penalties levied on Global, being the registration penalty, an inaccuracy penalty and an excise duty penalty (the PLNs).

d. A director's liability notice to Mr Malde for 100% of the civil evasion penalty in the sum of approximately £11.1 million, as a result of SA's dishonest failure to register for VAT and to submit VAT returns (the DLN).  

Global appealed the Decision and the Penalty and Mr Malde appealed the PLNs and the DLN, to the FTT. The FTT allowed the appeals of Global and Mr Malde. HMRC appealed to the UT. The UT dismissed HMRC's appeal and HMRC then appealed to the CofA. 

CofA judgment

The appeal was allowed.

The CofA remitted all of the open appeals to the FTT for rehearing in light of the principles established by its judgment.

The key issue before the CofA was whether the burden of proof fell on the taxpayers or HMRC, in a penalty appeal where the taxpayers were seeking to challenge the penalty on the basis that the underlying tax liability was wrong. 

The CofA held that in penalty proceedings the burden of proof is normally on HMRC to establish the primary facts needed to justify imposing the penalty in issue, but if the taxpayer wishes to contend that an underlying liability to tax is wrong, a separate legal burden rests on the taxpayer to prove it, in the same way as they would on appeal against an assessment or decision. In reaching this conclusion, the CofA relied on the following reasoning:

• The taxpayers admitted that the burden of proof on the issue of liability to tax would rest with them if the question was determined in separate appeal proceedings. Therefore, if they did not bear the burden of proof on that issue in a penalty appeal, this would lead to arbitrary and anomalous results.
• If the taxpayers did not bear the burden of proof on the issue of liability to tax in the current circumstances, it would subvert the long-established rule that the legal burden of proof normally lies on the taxpayer to displace an assessment to tax.
• Shifting the burden of proof to HMRC in the circumstances of the instant appeal would be inconsistent with the principles which justify the normal rule, the most important of which is that taxpayers will normally have access to all the information relevant to their tax affairs, and it would give rise to the risk of inconsistent decisions if the same question of underlying liability were determined differently depending on the stage at which it arises. 

The CofA also considered whether the fact that civil tax penalty proceedings in the UK are treated as giving rise to 'criminal charges' within the meaning of Article 6(1) of the European Convention for the Protection of Human Rights and Fundamental Freedoms, requires the legal burden to fall on HMRC to establish the correctness of the underlying liability to tax if it is put in issue by the taxpayer in the penalty proceedings. The CofA decided that it did not and noted that it was common ground that Article 6 did not apply to the underlying assessments and that the burden of proof lay on the taxpayers to displace those assessments. This remained the case even though HMRC had pleaded fraud.

Comment

This judgment is notable, not only because it overturned the conclusions reached by both the FTT and the UT, but because it has confirmed that when a taxpayer challenges a civil evasion penalty on the basis that the underlying tax liability underpinning the penalty is incorrect, the taxpayer bears the legal burden of proving that they are not liable for the underlying tax. 

It is understood that the taxpayers are seeking permission to appeal to the Supreme Court.

The judgment can be viewed here.