THIRD SECTION

DECISION

AS TO THE ADMISSIBILITY OF

Application no. 40042/98 by Marios and Androulla GEORGIOU against the United Kingdom

The European Court of Human Rights ( Third Section ), sitting on 16 May 2000 as a Chamber composed of

Mr J.-P. Costa, President ,

Mr W. Fuhrmann,

Mr L. Loucaides,

Sir Nicolas Bratza,

Mrs H.S. Greve,

Mr K. Traja,

Mr M. Ugrekhelidze, judges ,

and Mrs S. Dollé , Section Registrar ,

Having regard to the above application introduced with the European Commission of Human Rights on 17 December 1997 and registered on 27 February 1998,

Having regard to Article 5 § 2 of Protocol No. 11 to the Convention, by which the competence to examine the application was transferred to the Court,

Having deliberated, decides as follows:

THE FACTS

The first applicant is a British national, born in Cyprus in 1953, and the second applicant is his wife. The applicants live in Leicester and are represented before the Court by Ms Nuala Mole, a lawyer practising in London.

Particular circumstances of the case

In 1976 the applicants purchased a take-away food shop in Leicester and began trading as “ Mario’s Chippery ”. Most of their sales were of hot food, subject to value added tax (“VAT”) at the standard rate.

After a routine control visit in May 1989, Customs & Excise officers (“Customs officers”), who collect VAT on behalf of the Government, checked with several of the applicants’ suppliers and discovered that certain purchases had been understated. On five consecutive days from 9 October 1989, Customs officers secretly kept watch on the premises from a window on the upper floor of a property which was obliquely across the road from the premises and recorded details of customers entering and leaving and the number of “packets” or bags of food bought. They also observed and recorded all deliveries made.

On 18 January 1990 the applicants were interviewed by two Customs officers and a few days later their till readings were analysed. In mid August 1989 the shop had been refitted with a new electronic till. On demand the till could produce reports which summarised the transactions entered onto it. The relevant grand total reading for takings from 5 September 1989 to 26 January 1990 was £106,214.93. This was compared with declared takings of £49,000.

On 2 February 1990 the applicants admitted that they had been under-declaring takings and removing cash from the till since 1986. They also admitted to withholding purchase invoices from their accountants.

In May 1990 assessments were made by Customs Commissioners in respect of under-declared tax between January 1986 and October 1989. These were based on a weekly suppression rate derived from the till grand total for the period from September 1989 to January 1990. The grand till total was assumed to be tax exclusive and, with an adjustment for zero-rated sales, VAT at 15% was added. £15,000 was deducted to allow for keying errors and training and other non-transaction entries. The difference between the result and the declared takings for the same period was divided by the number of weeks for which the shop was open, to obtain the weekly suppression rate. This rate was then applied to earlier periods with periodic reductions to reflect assumed price increases. The assessment figure reached was £61,902. The tribunal later found that the observation figures were used as supporting evidence only.

On 15 June 1990 the applicants changed accountants and formally asked for the case to be reconsidered. The new accountants argued that the till memory was an unfair basis for assessing the tax as it included matters besides takings , and that it was impossible to ascertain the sums attributable to those matters. The figure put forward for tax due was £8,794.

The matter was reconsidered and Customs Commissioners issued amended assessments on 20 November 1990 for the sum of £56,444; this took the figure of £106,000 as inclusive of VAT and deducted £5,000 (as opposed to £15,000) for keying and training errors. On 13 December 1990 the applicants appealed against the reduced assessment of 20 November 1990 (the first appeal).

On 14 December 1990 Customs Commissioners formally issued the applicants with a notice of assessment of a penalty under section 13 of the Finance Act 1985 for dishonest evasion of VAT for sixteen accounting periods between 1 November 1986 and 31 October 1989. The tax evaded was stated to be £56,444 and the penalty was assessed at £53,631, 95% of the total, giving a reduction of 5% for co-operation under section 13(4) of the Act. The applicants appealed against this penalty on 26 July 1991 (the second appeal).

The VAT tribunal heard the consolidated appeals over 49 working days from March to July 1993. The applicants were represented by counsel with a specialised VAT practice, who had, according to their own case:

“an in depth familiarity with the theory of VAT law and extensive experience of taking VAT cases to both the tribunal and the High Court. She was at the time of the domestic proceedings the author of a leading practitioners’ work on the subject ‘The Encyclopaedia of VAT’” .

The applicants’ principal argument was that the review of the tax assessment in November 1990 ought to have been made according to the Commissioners’ best judgment (using the “best judgment” test which applied to the assessments themselves). They argued that the till readings were an unreliable indicator of the takings and should not have been used as the basis of the assessment. Accordingly, the Commissioners could not have used their best judgment in assessing the tax due and the assessments were void. They further submitted that the penalty reduction of 5% for co-operation was too low in the circumstances.

In its judgment of 28 April 1994, the VAT tribunal held that nothing in either the VAT Act 1983 or the Finance Act 1985 required a review of an assessment to be made according to “the best judgment” test. Nevertheless, it found that, in the circumstances, the review had indeed been made according to the Commissioners’ best judgment.

During the course of proceedings an issue had been raised by the applicants as to the Commissioners’ compliance with certain directions for discovery. The VAT tribunal commented:

“Although the discovery directions were not fully complied with, we are satisfied that eventually the [applicants] saw every existing document and were sufficiently informed of the contents of every other document which could possibly be considered as material to the applicants’ case and which was not privileged from production.

In our judgment the Commissioners’ failure to comply with the directions did not amount to wilful disobedience, and it was caused mainly by the Leicester office’s unfamiliarity with such directions and by the fact that the Commissioners took a relatively narrow view of the matters in issue in the case and of the documents which related to those matters, as opposed to the very wide view taken by the Appellants’ advisers.”

Although the applicants’ attack on the validity of the assessments failed as to quantum, the VAT tribunal held that £25,000 should be deducted as the proper figure for keying and typing errors (as opposed to £5,000), and it allowed an increase of 10% in takings for October 1989 following the shop’s refurbishment period. The tax due was reduced to £29,964.30, the penalty having been reassessed at 75%.

The applicants appealed to the High Court. In its judgment of 6 October 1995, the court held that there was no point of law upon which the High Court could intervene, since it was satisfied that the VAT tribunal had not misdirected itself in law in reaching the decision that the Customs Commissioners had exercised their best judgment in making the assessments.

The applicants further appealed to the Court of Appeal, challenging the tribunal’s decision that the Commissioners had exercised their best judgment. The Court of Appeal, following the case of Van Boeckel v Customs and Excise Comrs [1981] STC 290, reiterated that the VAT tribunal’s function is twofold: first to consider whether the commissioners have duly discharged their function and second to consider any further grounds put forward for reducing the assessment. Giving judgment on 25 February 1996, the Court of Appeal held that it was impossible to find fault with the figures reached by the tribunal. The Court of Appeal declined to decide the issue of whether the “best judgment” test applied to the review as well as the assessment, because it was not relevant to the case before it.

The Court of Appeal criticised the approach of the appeal petition, Lord Justice Evans noting at page 476 § j:

“What is not permitted, in my view, is a roving selection of evidence coupled with a general assertion that the tribunal’s conclusion was against the weight of evidence and was therefore wrong. A failure to appreciate what is the correct approach accounts for much of the time and expense that was occasioned by this appeal to the High Court.”

Lord Justice Evans commented again at page 477 § d,

“The notice of appeal to the High Court raised what were essentially factual issues stated as questions of law to the general effect that the tribunal had no right to make the findings which it did in the light of the evidence that it heard.”

Lord Justice Evans noted the failure to identify the issues in advance of, or even at the hearing, noting at page 469 § c:

“it must be said that there was a wholly indiscriminate and unnecessary attention to detail throughout.”

On the issue of the length of proceedings, Lord Justice Evans commented, at page 482 § b:

“I would say that the length of these proceedings was largely due to the failure to identify either at or before the beginning of the hearing, and to formulate, the issues that were raised. If this had been done the process of discovery would have been eased and the tribunal would have been better able to exercise control over the close examination of highly detailed evidence to which it was subjected.”

The appeal was dismissed and leave to appeal to the House of Lords was refused.

The applicants’ petition to the House of Lords was refused on 19 May 1997. Bankruptcy proceedings, commenced by the Customs Commissioners, have been adjourned pending consideration of the applicants’ case before the Court.

Relevant domestic law

The relevant part of paragraph 4 of Schedule 7 of the Value Added Tax Act 1983 (“the 1983 Act”), now Section 73(1) of the Value Added Tax Act 1994 (“the 1994 Act”), provides as follows:

“(1) Where a person has failed to make any returns under this Act or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect they may assess the amount of tax due from him to the best of their judgment and notify it to him.”

A provision for appeals is made in section 40(1) of the 1983 Act (sections 83-84 of the 1994 Act):

“40 (1). An appeal shall lie to a value added tax tribunal constituted in accordance with Schedule 8 to this Act against the decision of the Commissioners with respect to any of the following matters -

(m) an assessment –

( i ) under sub-paragraph (1) or (2) of paragraph 4 of Schedule 7 to this Act in respect of a period for which the appellant has made a return under this Act; or

(ii) under sub-paragraph (6) of that paragraph,

or the amount of such assessment.”

Under sub-sections (3B) and (4) respectively there are powers for the tribunal to increase or reduce the amount of any such assessment.

Section 13 subsection (1) of the Finance Act 1985 provides that:

“In any case where -

(a) for the purpose of evading tax, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to a criminal liability);

he shall be liable, subject to subsections (4) and (7) below, to a penalty equal to the amount of tax evaded or, as the case may be, sought to be evaded, by his conduct.”

Subsection (4) provides:

“If a person liable to a penalty under this section has co-operated with the Commissioner in the investigation of his true liability for tax…the Commissioner or, on appeal, a value added tax tribunal may reduce the penalty to an amount which is not less than half what it would have been apart from this subsection; and in determining the extent of any reduction under this subsection, the Commissioners or tribunal shall have regard to the extent of the co-operation which the person concerned has given to the Commissioners in their investigation.”

Section 21 subsection (1) of the Finance Act 1985 provides that:

“Where any person is liable -

(a) to a penalty under any of sections 13 or 17 above,

the Commissioners may … assess the amount due by way of penalty…and notify it to him accordingly; and the fact that any conduct giving rise to a penalty under any of sections 13 to 17 above may have ceased before an assessment is made under this section shall not affect the power of the commissioners to make such an assessment.”

COMPLAINTS

The applicants allege violations of Articles 6 and 13 of the Convention, and of Article 1 of Protocol No. 1. They claim that the penalty procedure under section 13 of the Finance Act 1985 constitutes a “criminal charge” within the meaning of Article 6. They recognise that the assessments of tax themselves did not determine either “civil rights” or “criminal charges” within the meaning of Article 6, but claim that the proceedings should be examined as a whole given that the penalty procedure depends on the assessments for its validity. They complain that the legal aid granted for proceedings in the Court of Appeal did not permit the instruction of leading counsel to argue the case, although the High Court on 14 February 1995 had expressed the view that the case merited leading counsel. They also complain that they were denied access to a number of relevant documents at the VAT tribunal hearing, that the VAT tribunal did not release its decision until nine months after the hearing had been concluded and that the proceedings took a full seven years from start to finish.

The applicants allege that the manner in which their tax assessments were reviewed by the Commissioners in November 1990 and subsequently by the VAT tribunal in 1991 constituted a violation of their rights under Article 1 of Protocol No. 1. They contend, first, that the present system does not require the Customs Commissioners to review the initial tax assessments to the best of their judgment, and, second, that the system does not permit the VAT tribunal to examine the actual amount of tax due when it determines the validity of the tax assessments. The applicants allege that these defects in the review machinery meant that no tribunal could effectively reassess and remedy the errors, which, they allege, were made in their original tax assessments. As a result, they complain that the errors were left uncorrected and accordingly the assessments constituted an arbitrary and disproportionate “deprivation of property” or “control of their property” within the meaning of Article 1 of Protocol No. 1. The applicants further allege that these defects in the review machinery denied them the opportunity of achieving an effective remedy required by Article 13.

THE LAW

1. The applicants allege a violation of Article 6 of the Convention, the relevant parts of which read as follows:

“1. In the determination …. of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law  …

3. Everyone charged with a criminal offence has the following minimum rights: …

(c) to defend himself in person or through legal assistance of his own choosing or, if he has not sufficient means to pay for legal assistance, to be given it free when the interests of justice so require; ….”

The Court has held that, generally, proceedings regarding taxation do not determine “civil rights” for the purposes of Article 6 of the Convention (cf. Schouten and Meldrum v. the Netherlands judgment of 9 December 1994, Series A no. 304, pp. 20-21, § 50, and 41548/98 Paul v. France, decision 7 March 2000).

In the present case, the applicants argue that the penalty proceedings under section 15 of the Finance Act 1985 determined a “criminal charge”. The criteria for establishing whether a “criminal charge” has been determined are the domestic classification of the “offence”, the nature of the “offence”, and the nature and degree of severity of the potential and actual penalty (see, for example, the Ravnsborg v. Sweden judgment of 23 March 1994, Series A no. 283-B p. 28, § 30 and the Schmautzer v. Austria judgment of 23 October 1995, Series A no. 328, p. 13, § 27). The Court notes that the penalty proceedings in the present case were classified as civil, rather than criminal, in domestic law. However, as in the Bendenoun v. France case (judgment of 24 February 1994, Series A no. 284, p. 27, §§ 44-48), the penalty was intended as a punishment to deter re-offending, its purpose was both deterrent and punitive and the penalty itself was substantial. These factors taken together indicate that the penalty imposed in the present case was a “criminal charge” within the meaning of Article 6 § 1.

As to whether the assessments themselves should also be seen as “criminal charges” for the purpose of the Article 6 guarantees, the applicants argue that since the penalty procedures rely on the assessments for their validity, it would be wrong not to look at the proceedings as a whole. The Court accepts that it is not possible, given the various matters which were being determined by the VAT tribunal, to separate those parts of the proceedings which determined a “criminal charge” from those parts which did not. It will consider the proceedings to the extent to which they determined a “criminal charge” against the applicants, although that consideration will necessarily involve the “pure” tax assessments to a certain extent.

As to the specific matters complained of by the applicants, the applicants first complain of the refusal of legal aid to instruct leading counsel for their appeal to the Court of Appeal. This is in light of the High Court’s view the case merited leading counsel. The applicants rely on the cases of Granger v United Kingdom (judgment of 28 March 1990, Series A no. 174) and Airey v Ireland (judgment of 9 October 1979, Series A no. 32) . The Court notes that in the present case the applicants were represented by counsel at all stages of the criminal proceedings, although not leading counsel. The applicants argue that leading counsel was needed due to the complexity of the case. However, the Court notes that the Customs Commissioners were not represented by leading counsel. Further, the applicants’ counsel had extensive experience and specialisation in VAT law.

Accordingly, the Court considers that the interests of justice did not require leading counsel to be instructed on the applicants’ behalf.

The applicants further claim that the Customs Commissioners did not fully comply with directions for the discovery of documents and, as a result, the applicants were unable to obtain clarification of the legal framework of the case, and were unable to establish as a relevant fact the correlation between a reasonable turnover and the amount of the revised tax. The Court notes that it is a requirement of fairness under Article 6 § 1, indeed one which is recognised under English law, that the prosecuting authorities disclose to the defence all material evidence for or against the accused (Edwards v the United Kingdom judgment of 25 November 1992, Series A no. 247-B, § 36). The Court is aware of no reason why that principle should not apply to criminal proceedings involving tax penalties. However, in the present case there appears to have been a disagreement between the applicants and the Customs Commissioners as to what constituted “material” evidence within the meaning of the court’s discovery directions. The applicants took an extremely wide view of the appropriate discovery, and the Customs Commissioners a narrow one. Nevertheless, the VAT tribunal was satisfied that the applicants had seen all relevant documents and the Court of Appeal rejected all challenges to the fairness of the proceedings. The Court recalls that in determining whether there has been unfairness, it must consider the proceedings as a whole including the decision of the appellate court (ibid. § 34).

The Court finds, in the light of the circumstances of the present case seen as a whole, that the applicants’ complaints as to discovery disclose no appearance of unfairness within the meaning of Article 6 of the Convention.

As to the length of the proceedings, the Court notes that the summons was issued on 12 December 1990 and leave to appeal to the House of Lords was refused in May 1997. The proceedings thus lasted six and a half years. The Court recalls that the reasonableness of the length of proceedings is also to be assessed in the light of the particular circumstances of the case, regard being had to three heads: the complexity of the case, the conduct of the applicant and the conduct of the authorities.

The Court recalls that the complexity of the case, balanced with the general principle of securing the proper administration of justice, may justify lengthy proceedings (see Boddaert v Belgium judgment of 12 October 1992, Series A no. 235, § 39, and Katte Klitsche v Italy, judgment of 27 October 1994, Series A no. 293-B, § 61, where proceedings lasted six years and three months and eight years respectively). The applicants themselves acknowledge the particular complexity of the present case.

As to the conduct of the applicants, the Court notes that this matter was appealed by the applicants at every stage with an appeal in July 1991 against the penalty procedure heard before the VAT tribunal in 1993, an appeal to the High Court judge in February 1995, and appeals to the Court of Appeal in 1996 and the House of Lords in May 1997. Moreover, in the present case there are several suggestions (in the transcript of proceedings before the High Court and in the Court of Appeal’s judgment) that the length of the proceedings was a direct result of the applicants’ failure to define and narrow the issues in the case. Whilst it is open to a defendant in criminal proceedings to avail himself of all procedural steps open to him, the applicants’ appeals in this case appear to have added unnecessarily to the complexity of the case. The Court also notes that in the petition to the House of Lords, the applicants were contesting that the VAT tribunal erred in law, a claim which they did not raise before the Court of Appeal.

As to the conduct of the authorities, the applicants have pointed to no specific delay save for the fact that the VAT tribunal did not release its decision until nine months after the hearing had been concluded. However, the case had been heard over forty nine working days before the VAT tribunal, and was the longest ever running VAT appeal case in the United Kingdom. In the circumstances, the Court is of the opinion that the length of proceedings and the delay in the judgment were justified by complexity of the case and conduct of the applicants.

In so far as the applicants complain under Article 6 that no tribunal could effectively review the assessments, the Court considers that the applicants did, in fact, have an opportunity to have the assessments reviewed by the VAT tribunal. The VAT tribunal not only considered whether the Commissioners had duly discharged their function, but also considered further grounds put forward for reducing the assessments. It was on this basis that the tax due was reduced to £29,964.30 and the penalty reassessed at 75%, i.e. £22,473.22.

It follows that this part of the application is manifestly ill-founded within the meaning of Article 35 § 3 of the Convention, and that it must be rejected pursuant to Article 35 § 4.

2. The applicants also allege violations of Article 1 of Protocol No. 1, which provides:

“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”

The applicants first complain that the system does not require the VAT tribunal to apply the “best judgment” test when reviewing the Commissioners’ assessment of the tax due. However, the tribunal found as a fact that the Commissioners had reviewed the assessments to the best of their judgment. Accordingly, the applicants cannot claim to be a “victim” of a violation of the Convention within the meaning of Article 34 in this respect.

Secondly, the applicants complain that the system does not require the VAT tribunal to examine the actual amount of tax to be collected in order to determine whether the assessments were valid. However, the tribunal did in fact reassess the tax due. The Court refers to the tribunal’s findings that it was right to base the assessments on the till readings, that £25,000 was the correct figure for typing and training errors (as opposed to £5,000), and that the figures for October 1989 should be increased by 10% to account for the refurbishment of the shop. On this basis they found that the correct figure for the amount of tax due was £29,964.30, as opposed to the Commissioners’ figure of £56,444. They also reduced the penalty percentage from 95% to 75%, which further reduced the sum due to £22,473.22. Accordingly, the VAT tribunal did examine the actual amount of tax to be collected in determining whether the assessments were valid.

The points raised by the applicants, in any event, concern the right of States to enact such laws as they deem necessary for the purpose of “securing the payment of taxes” (see for example Gasus Dossier GmbH v the Netherlands, judgment of 23 February 1995, Series A no. 306-B, p. 48, § 59). In that case it was held that the legislature must be allowed a wide margin of appreciation and that “the Court will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation.” In the present case, that the review machinery under the VAT Act 1983 cannot be said to be devoid of reasonable foundation.

It follows that this part of the application is also manifestly ill-founded within the meaning of Article 35 § 3 of the Convention, and that it must be rejected pursuant to Article 35 § 4.

3. The applicants finally claim that the allegedly defective review machinery violated Article 13 of the Convention, which guarantees an effective remedy for Convention breaches. In the absence of any “arguable claim” of a substantive right under the Convention (see the Boyle and Rice judgment v the United Kingdom of 27 April 1988, Series A no. 131, p. 24, § 54), the Article 13 complaint is also unsustainable.

It follows that this part of the application is similarly manifestly ill-founded within the meaning of Article 35 § 3 of the Convention, and that it must be rejected pursuant to Article 35 § 4.

For these reasons, the Court, unanimously,

DECLARES THE APPLICATION INADMISSIBLE .

S. Dollé J.-P. Costa Registrar President