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The meaning of “dishonesty” in English criminal law

Legal wig copyright David Winch 2014
What is meant by “dishonesty” in English criminal law? When considering the meaning of dishonesty the criminal courts of England and Wales until now often referred to a case decided last century. Recently in the case of Ivey v Genting Casinos (UK) Ltd (t/a Crockfords) [2017] UKSC 67 (25 October 2017) the UK Supreme Court reconsidered the meaning of dishonesty – and came to some new conclusions.

 

The two-stage ‘Ghosh’ test

Until October 2017 the leading case on the meaning of dishonesty in English criminal law was R v Ghosh [1982] EWCA Crim 2. In that case, decided in 1982, the Court of Appeal determined that there was a two-stage test for dishonesty. The first stage was based on an objective criterion and the second stage was based on a subjective criterion. The two stage test was put in the following terms:-

“In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, that is the end of the matter and the prosecution fails.

If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly. It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did.”

So until October 2017 criminal courts operated on the basis that not only must the conduct of the defendant be dishonest by the ordinary standards of reasonable and honest people (the objective test) but the defendant himself must have realised that he was acting dishonestly by that standard (the subjective test).

 

The subjective test

What was implied in Ghosh, was that a defendant was entitled to say, “I did not know that anybody would regard what I was doing as dishonest” and if he was believed he should be acquitted of dishonesty (as the subjective test was not satisfied).

But the Supreme Court has now criticised that approach, saying that “It has the unintended effect that the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour”.

The new judgment means that it is still necessary for the jury in the Crown Court or the magistrates in the Magistrates’ Court to reach conclusions about the actual state of mind of the defendant – but only insofar as this relates to the defendant’s state of knowledge or belief as to the facts.  The Supreme Court has now said that criminal courts should no longer ask themselves whether the defendant himself realised that he was acting in a way which ordinary people would consider to be dishonest.

 

The new legal position

So instead of the Ghosh test, when dishonesty is in question the court must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The question is not whether that belief is reasonable – the question is whether it is genuinely held.  Once his actual state of mind as to knowledge or belief as to the facts is established, the question whether his conduct was honest or dishonest is to be determined by the jury or magistrates by applying the (objective) standards of ordinary decent people.

There is no longer any requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.

One consequence of this is that the definition of “dishonesty” is now consistent between criminal and civil law in England and Wales.

 

An example

Suppose a person is newly arrived in England and he has come from a country in which all public transport is free.  He gets on a bus in London and on arriving at his destination gets off without paying.  He is charged under s3 Theft Act 1978 with dishonestly making off without payment.  But was he dishonest?

The issue is ‘Did he genuinely believe that no payment was required?’.  If he did then he has not been dishonest and should be acquitted.  If, on the other hand, he did know that payment was required then he was dishonest by not paying.

But this issue concerns the defendant’s belief about the relevant facts – the issue is not about his understanding of what constitutes “dishonesty”.  That is the change in the law as a result of the Supreme Court’s ruling in October 2017.

 

Is the defendant’s state of mind irrelevant?

So is it now totally irrelevant that the defendant wrongly believed that what he was doing was acceptable behaviour?  Well, not entirely.  A defendant’s deluded belief that he was not acting dishonestly (for example because he hoped one day to repay money which he was stealing and spending) will not now result in his acquittal.  But it could be put forward in mitigation on sentencing that he had no intention to cause harm to his unfortunate victim.

Contacting us

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David

(Note: This article applies to matters arising under the provisions of the criminal law in England and Wales.  Appropriate professional advice should be sought in each individual case.)

Dealing with rogue tax accountants

Do HM Revenue & Customs have the powers, the resources and the determination to deal with rogue tax accountants?

I am not here referring to those who promote the complex and sophisticated tax avoidance schemes which make newspaper headlines.  I am referring to small firms of tax accountants, or one man bands, who act for small or micro businesses for modest fees but who are – in a small minority of cases – utterly incompetent, irresponsible or even dishonest.

 

Poor work

The sorts of poor work performed by this small minority include over-claiming of expenses, under-declaration of gross income, erroneous taxable profit computations and claims for tax reliefs, and a lack of integrity which allows the tax accountant to ‘change history’ by backdating events such as the declaration of a dividend of the commencement of a business partnership.

Undoubtedly these sorts of accidental or deliberate ‘errors’ by a small minority of incompetent, irresponsible or dishonest tax accountants cost HMRC millions in lost taxes every year.

 

Tax accountants or tax agents?

I refer to these people as tax accountants.  HMRC would refer to them as tax agents, because they act as the agent for their client in dealing with HMRC.  However their clients would refer to them as their accountant, not their agent, and so I am referring to them as tax accountants rather than tax agents.

 

Why would a rogue accountant succeed?

Proprietors of small and micro businesses generally have neither the skills nor the desire to get involved in the nitty gritty of accounts preparation or the completion of their annual tax returns.  They are unlikely to be in a position to evaluate the competence of their tax accountant except to the extent of regarding a lower tax bill as a sign of a better service.

A rogue accountant may be able to produce a lower tax bill for a smaller fee, and ask fewer irritating questions of his client, than a more competent tax accountant would in performing his work thoroughly and with integrity.

 

So what’s the problem?

A rogue accountant will cause problems for HMRC in terms of tax revenues which are ‘lost’ and problems for competing honest and competent tax accountants who will be unable to offer an apparently comparable service.

But ultimately a rogue tax accountant will create a problem for his client if and when HMRC investigate his tax affairs and seek from him payment of under-declared taxes, interest and penalties.

 

Current trends

There are a number of current trends which, in the author’s view, will lead to a worsening of the problem.  Whilst a reduction of ‘red tape’ for small businesses is welcome in many respects, the simplification of accounting and tax return requirements gives more scope for rogue tax accountants to continue in practice undetected.  At the same time it has become increasingly prevalent for individuals to earn their living by self-employment, requiring the completion of a self assessment tax return, rather than as employees of larger organisations.

This has coincided with a reduction in HMRC staff numbers and a new emphasis on relying on tax accountants to file information directly into HMRC computer systems so that fewer sets of figures are routinely reviewed, even briefly, by HMRC staff.  Indeed HMRC are working on proposals to give tax accountants greater scope to deal with their clients’ tax affairs without the intervention of HMRC staff.

 

The role of professional accountancy bodies

But isn’t it the role of the professional accountancy bodies to ‘police’ their members to ensure that they are honest, competent and act with integrity?

Although it is not well known, anybody can set up in business as an accountant and act as a tax agent.  It is estimated that approximately one in four tax agents registered with HMRC holds no recognised accountancy or tax qualification.

So whilst the professional accountancy bodies do exercise a role in ‘policing’ their members, there is nothing they can do to ‘police’ non-members.

 

What are HMRC and the government doing?

HMRC can and do prosecute rogue tax accountants.  But such prosecutions are few in number because a criminal prosecution is very resource intensive, expensive and slow to come to fruition.  HMRC have a high success rate in securing convictions when they do prosecute – but that may simply be an indication that they prosecute only in the worst and most obvious cases.

Penalties can be very severe upon conviction.  Cheating HMRC is one of the relatively few criminal offences in English law for which there is no maximum sentence.

Aside from criminal prosecution, HMRC have power to levy civil penalties on tax accountants under Schedule 38 Finance Act 2012.

But all of these powers relate only to dishonest tax accountants – not to those who are merely incompetent or irresponsible.

 

Tax Agent Initiative Team

Perhaps in an attempt to fill that gap, HMRC have established a Tax Agent Initiative Team (TAIT) which has identified tax accountants whose clients appear to include a relatively high number of tax repayment cases – with a particular emphasis on subcontractors in the construction industry (CIS repayment cases).  TAIT is conducting a programme of contacting these accountants, initially by letter, with a view to ensuring an acceptable standard of work by them in relation to the examination of their clients’ business records and the accuracy of tax returns submitted by them on behalf of their clients.

In particular TAIT is requesting tax accountants whom it has identified to voluntarily agree, by way of a signed Memorandum of Understanding, to confirm that the tax accountant:

  • will examine underlying client records, at least on a sample basis,
  • will ensure that each client views and approves his completed tax return before it is submitted to HMRC, and
  • does not complete any subcontractor’s tax return in which expenses claimed exceed 20% of gross income unless the tax accountant has seen all the records to support that level of expenditure.

Alongside the Memorandum of Understanding programme, HMRC are conducting visits to some tax accountants to discuss HMRC’s expectations of the professionalism to be exhibited by them.

HMRC point out that in the event of a lack of cooperation from the tax accountant they may put a temporary stop on tax repayments in respect of tax returns submitted, pending completion of HMRC’s own assurance tests on returns submitted by that tax accountant.

The focus of this exercise is on tax repayment cases – not on cases in which tax is payable by the client but in a lower amount than the true liability.

 

What is not being done?

HMRC have no requirement that a person acting as a tax accountant must be ‘fit and proper’.  There is no express legal provision a stop an individual acting as a tax accountant if he has, for example, a previous conviction for tax fraud.  (Extremely rarely HMRC will decide to withdraw the tax agent status of an accountant but this has apparently been done only twice in the history of HMRC and on the basis that HMRC has a general discretion in discharge of their functions under s9 Commissioners for Revenue & Customs Act 2005.)

Nor is there any requirement that a person has any particular knowledge or skills before acting as a tax accountant.  Anybody can set up as a tax accountant.

There is no legal requirement for a tax accountant to have a separate bank account, known as a ‘client account’, to safeguard monies which he receives but which belong to his clients – such as income tax repayments which he has received on their behalf.

Even more surprisingly, HMRC have no powers to levy civil penalties on a tax accountant who is incompetent or irresponsible (without being dishonest) and consequently files tax returns which understate his clients’ tax liabilities.  HMRC, and English law, take the view that where incorrect tax returns are filed penalties are chargeable on the client – not the tax accountant.  It is then for the client, if he can, to recover the penalty from the tax accountant by suing him for negligence – but there is no legal requirement for a tax accountant to carry insurance to cover any such claims.

Although the provisions of Schedule 24 Finance Act 2007 could be read as creating a liability to penalties for a tax accountant who incompetently or irresponsibly files an incorrect return for his client, HMRC have indicated that they have no intention of levying penalties on tax accountants under this legislation.

So it seems that the burden is on clients, and potential clients, of tax accountants to ensure that the person they instruct is sufficiently competent, thorough and honest to do the work properly.  Or, of course, a taxpayer can simply do the job himself, calculating his own taxable income – and the best of luck with that!

David

(Note: This article refers to tax law in England and Wales. There are a number of additional issues which could be relevant to tax liabilities and penalties in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)

Accountant sentenced to 7 years for cheat & fraud

Legal wig copyright David Winch 2014An accountant has been sentenced to 7 years’ imprisonment for cheating HMRC and defrauding his clients.

Simon Terry Pearce, 48, who held no recognised accountancy qualifications, ran S T Pearce Accountants from offices in St Austell, Cornwall.  He was convicted on 26 charges after a ten week trial at Truro Crown Court.  The prosecution evidence assembled by HM Revenue & Customs ran to approaching 40,000 pages and, in total, 51 prosecution witnesses were called to give evidence.

 

The allegations

It was alleged that over a period of several years Mr Pearce had operated his practice dishonestly by preparing tax returns for his clients which overstated their business expenses and the tax which they had suffered under the Construction Industry Scheme (CIS tax), overclaimed capital allowances particularly in relation to cars and – in relation to Capital Gains Tax – understated the sales proceeds of properties.  In many cases Mr Pearce had revised previous years’ tax returns for new clients.  The result of all this was that his clients’ tax liabilities were dishonestly understated and tax refunds were generated falsely.

It was further alleged that Mr Pearce had forged clients’ signatures and dishonestly abused HMRC’s Structured Action Request online system for taxpayers and their authorised agents with the result that clients’ tax refunds were paid by HMRC into his bank account rather than to the clients.  Whilst in some cases these refunds were forwarded to clients fully and reasonably promptly, in many cases refund payments were delayed (sometimes by a period of years), or paid on only in part, or not paid on at all.

Finally it was alleged that in relation to Mr Pearce’s own tax returns he had dishonestly understated his fee income and that he had failed to register his business for VAT at the appropriate time.

 

Mr Pearce’s defence

Mr Pearce said that he had not been dishonest. The tax returns which he had prepared for clients reflected the information which clients had provided to himself and his staff at interviews with them.  He had included fair estimates of expenditures for which the clients had no documentary evidence, particularly in relation to travelling and subsistence.  He had misunderstood tax law in relation to motor cars, believing that 100% first year allowances or annual investment allowances were available, and the abolition of CGT taper relief in 2008 had not come to his attention.

He had arranged for clients’ tax refunds to be paid to his bank account when fees were due to him.  His failure to pass the balance of refunds on to clients was as a result of inadequate and misleading information received from HMRC, poor record keeping in his office and pressure of work resulting from having taken on too many clients.  He had fobbed off clients who had enquired about their refunds and had given them excuses and explanations for delays which were untrue.  He accepted that he had used HMRC’s online Structured Action Request facility to arrange refunds to be paid to him but believed he was entitled to do so.

He asserted that clients’ income tax returns were only submitted to HMRC after clients knew what was on them, albeit that the clients may have received and signed paper copies of the returns only after they had been filed online with HMRC.

 

My role

I was instructed by Mr Pearce’s solicitors and counsel to advise them on generally accepted conduct by accountants in relation to the preparation of accounts and tax returns for clients, relevant tax law and practice, the proper treatment of clients’ tax refunds, and to examine Mr Pearce’s own business records and those of certain of his clients, together with the associated accounts and tax computations, to advise whether tax liabilities had been understated.

I attended court and advised the defence team throughout the presentation of the prosecution case but I was not myself called to give evidence.  The only witness called by the defence was Mr Pearce himself.

 

The clients’ evidence

The clients typically gave evidence to the effect that they relied upon and trusted Mr Pearce as their accountant to deal properly with their accounts and tax affairs.  In many cases they denied providing Mr Pearce with information which he claimed to have received from them.

They did not themselves understand accounts or tax and believed that their tax returns were being correctly prepared and that they were entitled to any refunds which they had received.  They were devastated when they learned that they were required to repay substantial sums to HMRC.

 

The outcome

The jury found Mr Pearce guilty on 26 of the 30 counts which he faced.  Clearly the jury considered him to have been thoroughly dishonest over a period of years.

 

The lessons to be learned

Mr Pearce frequently received tax refunds on behalf of clients but did not operate a client bank account.  In practice refunds received were swallowed up by business and private expenses leaving Mr Pearce unable to pass on to clients the monies which were due to them.

The firm’s working papers and interview notes in support of figures in the accounts and tax returns were inadequate to demonstrate persuasively which figures were based on information that had been provided by clients and which were based on estimates made by Mr Pearce apparently based on his general knowledge of his clients’ activities – or to refute the allegations that some increases in claimed expenses arose purely from fabrications by Mr Pearce.

In many cases business expenses in accounts and returns had apparently been compiled based only on an examination of paid bills and discussions with clients – and without examination of clients’ bank statements.  In the majority of cases which I examined Balance Sheets had not been prepared.  Had the accountancy work been more thorough then many mis-statements which were made on tax returns, for example from duplication of genuine expenditures, could have been avoided.

Either Mr Pearce’s knowledge of tax law and practice was faulty and out of date in important respects or he was claiming allowances and reliefs for his clients which he knew were not available to them.

 

Overview

This was a very significant prosecution by HMRC, the biggest case ever prosecuted by them in Cornwall, and a major case by any standards.  Few Crown Court trials run to ten weeks or involve over 50 witnesses and few criminal investigations generate approaching 40,000 pages of exhibits.  The prosecution asserted that Mr Pearce had ultimately retained £170,000 in refunds due to his clients and that overall HMRC had lost between £1 million and £2 million as a result of his activities.

I have no doubt that my advice was valuable to the defence in professionally examining the prosecution evidence and ensuring that it was appropriately challenged.  Ultimately the weight of evidence against Mr Pearce was overwhelming and the jury were sure that he had been dishonest.

David

(Note: This article refers to a criminal prosecution in England and Wales. There are a number of additional issues which could be relevant to criminal proceedings in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)

17 year sentence for VAT carousel fraud

Recently Dilawar Ravjani was sentenced to 17 years imprisonment following conviction for conspiracy to cheat the public revenue.  He was said to be the ring-leader in a complex missing trader intra community (MTIC) VAT fraud – sometimes known as carousel fraud.  But was that sentence – reportedly the longest ever given to an individual in the UK for this type of fraud – too harsh?

 

The offending

It is said that Mr Ravjani was at the head of a conspiracy involving purported trading in mobile phones of a total value of £1.7 billion.  But some of the phones did not even exist and a total of 5,700 fake transactions had been created to give the appearance of legitimate trading.  HM Revenue & Customs started their investigation in 2006.  It culminated in five trials and the conviction of 15 conspirators.  Only recently has the final trial been concluded.  The total VAT loss to HMRC was £107 million.

Undoubtedly the offending was serious.

 

The criminal charges

Mr Ravjani was charged and convicted of a single offence of ‘Conspiracy to Cheat the Public Revenue’.  He was sentenced to 17 years imprisonment and banned from acting in the management of a company for 15 years.  He is also to be subject to confiscation proceedings.

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years.  The common law offence of ‘Cheat’ had applied more widely but was abolished by s32(1)(a) Theft Act 1968 except in relation to the public revenue.  The logic of that abolition was that the statutory offences set out in the Theft Act 1968 replaced the old common law.

One of the consequences of this was that, except in relation to offending concerning the public revenue, the statute introduced maximum sentences for offending formerly prosecuted as ‘Cheat’.  The maximum sentence for theft was originally set at 10 years imprisonment.  For some offences a lower maximum was set, for example ‘false accounting’ carried a maximum sentence of 7 years.

In relation to VAT a criminal offence was enacted by s72(1) Value Added Tax Act 1994 where “any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person”.  Subsection (2) provides that “the evasion of VAT includes a reference to the obtaining of . . . the payment of a VAT credit”.  A ‘VAT credit’ is defined in s25(3) to include a VAT refund paid following the submission of a trader’s VAT return.

So it seems that Mr Ravjani could have been prosecuted under s72 VAT Act 1994.  But the maximum sentence for an offence under that section is 7 years imprisonment.

It appears to be the case that the offending occurred prior to the coming into effect of the Fraud Act 2006, which provides a maximum sentence of 10 years for fraud by false representation and similar offences.

However had the victim of this fraud been a wealthy individual, rather than the public purse, the maximum penalty (for the common law offence of conspiracy to defraud) would have been 10 years.

Mr Ravjani was not charged with any money laundering offence under Part VII, Proceeds of Crime Act 2002.  Such offences carry a maximum sentence of 14 years imprisonment.

the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence or with the common law offence

So it seems that the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence of s72 VAT Act 1994 (with a maximum sentence of 7 years) or with the common law offence of ‘Cheating the Public Revenue’ (which has no statutory maximum sentence).

It is perhaps not surprising that they chose to charge Mr Ravjani with the common law offence.  But were they entitled to do so?

 

Common law v statutory offences

It might be argued that Mr Ravjani ought to have been charged with the statutory offence under s72 VAT Act 1994 because his alleged criminal conduct fell within the scope of that statutory offence.

good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise

In the case of R v. Rimmington [2005] UKHL 63 Lord Bingham said this at paragraph [30]:
“Where Parliament has defined the ingredients of an offence, perhaps stipulating what shall and shall not be a defence, and has prescribed a mode of trial and a maximum penalty, it must ordinarily be proper that conduct falling within that definition should be prosecuted for the statutory offence and not for a common law offence which may or may not provide the same defences and for which the potential penalty is unlimited.  . . .    It cannot in the ordinary way be a reason for resorting to the common law offence that the prosecutor is freed from mandatory time limits or restrictions on penalty.  It must rather be assumed that Parliament imposed the restrictions which it did having considered and weighed up what the protection of the public reasonably demanded.  I would not go to the length of holding that conduct may never be lawfully prosecuted as a generally-expressed common law crime where it falls within the terms of a specific statutory provision, but good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise”.

It is clear that Mr Ravjani was regarded as the organiser and ring-leader in this conspiracy.  It is also clear that other members of the conspiracy were convicted of money laundering and sentenced to prison terms in excess of 7 years.  It follows that, had Mr Ravjani been prosecuted only under s72 VAT Act 1994, he would have received a lighter sentence than other conspirators who were considered less culpable.

But is that, in the words of Lord Bingham, “good reason for doing otherwise”?

It has to be said that appropriate sentencing in this area remains open to debate.  In the Court of Appeal judgment R v Meehan [2006] All ER (D) 105 it was indicated that organisers of such frauds should expect sentences well into double figures – clearly in excess of those envisaged in VAT Act 1994.  That appears to leave a tension between the views of the Court of Appeal and those of Lord Bingham in the House of Lords.

Perhaps that should be resolved by Parliament looking again at the 7 year maximum sentence under s72 VAT Act 1994?

But can it be right that a person who defrauds the public purse faces a higher sentence on conviction than a person who defrauds wealthy individuals or businesses?

David

P.S.  Mr Ravjani might, on the other hand, consider himself fortunate to have been prosecuted in England rather than in another jurisdiction.  At least he did not have to face a very, very long sentence such as that meted out in the US courts in the case of Bernie Madoff – 150 years!

UPDATE
On 29 November 2012 the Court of Appeal refused Mr Ravjani’s application for leave to appeal against his 17 year sentence R v Ravjani [2012] EWCA Crim 2519.

SECOND UPDATE
The Court of Appeal on 17 December 2013 in the case of Dosanjh & Others v R. [2013] EWCA Crim 2366 commented upon the use of common law charges in circumstances where the offending could be covered by a statutory offence. They said, at paragraph [33], “we are entirely confident that as far as Parliament is concerned, the offence of conspiracy to cheat the public revenue retains its established and clearly understood role in the prosecution of revenue cases. It is used to supplement the statutory framework and is recognised as the appropriate charge for the small number of the most serious revenue frauds, where the statutory offences will not adequately reflect the criminality involved and where a sentence at large is more appropriate than one subject to statutory restrictions”.
In practice however I see the common law offence being charged apparently routinely in cases which could not be described as “the most serious revenue frauds”. Will that no longer be the case in future?

The Court of Appeal decision in Ahmad & Ahmed v R

Last month the Court of Appeal slashed the largest confiscation orders ever made in England & Wales.  The Crown Court had made orders of over £92 million each against Shakeel Ahmad and Syed Ahmed.  The Court of Appeal cut each order to just over £16 million, Ahmad & Ahmed v R [2012] EWCA Crim 391.  But in doing so did the Court of Appeal properly apply the wording of the legislation or did it allow itself to be excessively influenced by what it believed to be the underlying objective of confiscation?

The confiscation orders were made under the confiscation provisions of the Criminal Justice Act 1988, which are in many respects very similar to the confiscation provisions of the Proceeds of Crime Act 2002.  The statutory ‘criminal lifestyle’ assumptions did not apply to these defendants, who had each been convicted of a single count of ‘conspiracy to cheat the public revenue’ in relation to a massive VAT ‘carousel’ fraud (more correctly a Missing Trader Intra Community VAT fraud, or MTIC fraud).  The fraud had involved transactions, and movements of monies, between various companies under the control of the appellants.

The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports

Essentially the fraud operated in this way.  High value goods were imported into the UK by one company, then sold to another, and another, and ultimately re-exported to the overseas company which had supplied them in the first place.  Sometimes the entire chain of transactions were completed in a single day.  The intermediate companies are known as ‘buffer companies’.  The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports.  But if the company from which it has purchased those goods dishonestly fails to make payment to HMRC of the VAT it charged when selling the goods to the exporter, then HMRC will be out of pocket and the fraudsters will reap the benefit.

The appellants had been involved in 32 very large transactions in a period of less than 3 weeks.  These had resulted in VAT refunds of over £12 million.

In the confiscation proceedings it was accepted that the court was entitled to ‘pierce the veil’ of incorporation of a company used by the fraudsters.  It was held that they each had jointly obtained what the company had obtained.

 

The difficulty

Where the difficulty arises is that this company received monies which reflected the value of the goods plus the VAT on them.  The Crown Court judge made a finding that it was “a necessary part of the deception on HMRC that an amount representing the value of the goods and the VAT thereon should pass through the [bank] accounts of the buffer companies”.

The judge made a confiscation order reflecting not just the VAT lost to HMRC, but the £72 million value of the bank transactions

The Crown Court judge therefore made a confiscation order reflecting not just the £12 million VAT lost to HMRC, but reflecting the £72 million value of the bank transactions – in other words based on the value of the goods plus the VAT on them.  The issue on appeal was whether the Crown Court judge had been right to do that.

The relevant legislation, s71(4) Criminal Justice Act 1988 provides that “a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained”.  The Crown Court judge held that the full amount passing through the bank account was ‘obtained as a result of or in connection with’ the offence.

The Court of Appeal disagreed and found that only the VAT was ‘obtained as a result of or in connection with’ the offence.  The remaining monies were the costs incurred in committing the offence rather than benefit obtained from the offence.

 

Which court was right?

I am bound to say that I think both courts came to an incorrect figure of benefit.

I would have looked at the issue from a different perspective

I would have looked at the issue from a different perspective.  It seems to me that the bank transactions were a necessary and integral ingredient of the fraud.  The bank transactions, in my view, were made as a result of or in connection with the offence.

I have considered what is meant by ‘as a result of or in connection with’ in an earlier article on this blog HERE.

But I do not believe the appellants can properly be said to have ‘obtained’ monies which they already had.  Neither the Crown Court nor the Court of Appeal appears to have found it necessary to consider where the monies needed to conduct the fraud came from.  Furthermore, there is a suggestion in the judgment of the Court of Appeal that monies were recycled and used repeatedly in the course of the 32 transactions.  So the monies actually ‘obtained’ by the appellants could be very considerably less than the £72 million figure used by the Crown Court judge.

The Court of Appeal did not find it necessary to consider those aspects further – which was unfortunate in my view.  The consequence is, I would suggest, that the aggregate amount ‘obtained’ by the appellants as a result of or in connection with the offence remains unknown.  It will not be less than the loss incurred by HMRC but may be greater than that figure depending upon the amounts and sources of the other monies employed in the fraud.

David

UPDATE : This case was the subject of an appeal to the UK Supreme Court.  Comments on the Supreme Court judgment can now be found in my newer blog articles “UK Supreme Court rules on benefit obtained jointly” and “Supreme Court caps confiscation enforcement“.

Calamitous consequence of a failure to notify HMRC

Should one feel sorry for Gareth Edward Steed?

Mr Steed engaged in what the Crown Court judge described as “moonlighting” – legitimate trading which he failed to declare for tax.  Indeed it seems he was not on HMRC’s ‘radar’ at all.  He received no tax returns and he failed to notify HMRC of his chargeability to tax.

It seems that he was a ‘grafter’ prepared to do anything legitimate to make money – whether that involved buying and selling second hand cars, undertaking building work, or whatever.  Perhaps he also was engaged in some rather less legitimate ‘business’ too.

somehow he was ‘rumbled’

But somehow he was ‘rumbled’.  Ultimately he was charged with three counts of tax evasion.  As often happens in criminal cases there were clearly some sort of discussions between the two sides before the matter came to court.  As a result the original three charges were dropped and one new charge was introduced – to which Mr Steed pleaded guilty.

The charge was one of common-law ‘cheat’ in that between 1 April 2003 and 31 December 2004 Mr Steed failed “to submit declarations of tax due including the proceeds derived from the sale of vehicles, furniture and tools together with that from building work”.

Mr Steed accepted that, as a result, a tax liability of at least £3,558 had arisen for 2002/03 which had escaped self-assessment.

But that was not the end of Mr Steed’s troubles because, following his conviction for ‘cheat’ HMRC pursued confiscation proceedings.

They argued that he had a ‘criminal lifestyle’ for confiscation purposes on the basis that he had committed an offence over at least 6 months from which he had gained a benefit of at least £5,000 (s75 PoCA 2002).  In that connection HMRC pointed out that had a tax return been submitted for 2002/03 it would have triggered not only payment of £3,558 for 2002/03 but also a payment on account for the following year.  In consequence the amount involved exceeded £5,000.

Applying the ‘criminal lifestyle’ assumptions the judge found that Mr Steed was unable to produce evidence to rebut the statutory assumptions

The Crown Court judge agreed.  Applying the ‘criminal lifestyle’ assumptions the judge found that Mr Steed was unable to produce evidence to rebut the statutory assumptions that amounts expended by him and assets held by him had been obtained in consequence of unspecified general criminal conduct on his part.  He made a confiscation order against Mr Steed for £707,200 (with a four year prison sentence in default of payment by the due date).

That sum was Mr Steed’s ‘available amount’, which is normally calculated to be the value of the defendant’s gross assets less any liabilities secured on them (such as mortgages).

The Crown Court judge also formed the view that Mr Steed had probably been engaged in other criminal activity too.  He said, “It may be that the defendant . . . would not be convicted on the criminal standard of all the matters to which I have referred. It is a question of viewing an overall picture and the conclusion I come to is that the overall picture supports the contention that it is more likely than not that he was involved in criminal conduct over and above the Count to which he pleaded guilty”.  He referred to “money-laundering, drug-dealing, the possession of goods bearing false trademarks with a view to sale, the evasion of duty and benefit fraud”.

Mr Steed appealed.  The Court of Appeal in a decision published on 1 February 2011 upheld the confiscation order and dismissed the appeal – Steed v R [2011] EWCA Crim 75.

In particular the Court of Appeal recognised that the proceeds derived from legitimate trading (such as sales of used cars) were not themselves benefits of criminal conduct.  Rather the benefit consists of the tax evaded.

The Court of Appeal accepted that “where a trader evades tax and proves, on the balance of probabilities, that his assets and expenditure derived from legitimate trading on which he paid no tax then the trader will have rebutted the statutory assumptions”.  In that event the only benefit remaining for confiscation would be an amount equal to the tax evaded.

the appellant was unable to establish on the balance of probability the extent to which the sources of his assets and expenditure were legitimate

But crucially it also noted that the Crown Court judge had found that “the appellant was unable to establish on the balance of probability the extent to which the sources of his assets and expenditure were legitimate and the extent to which they were illegitimate. Since he was unable to prove what proportion was legitimate the consequence was that in relation to any given asset or item of expenditure he could not prove that the property was not held by him as a result of his general criminal conduct”.

It followed that he was unable to rebut the statutory assumptions in relation to monies he had expended and assets which he held.

So the financial consequences of Mr Steed’s failure to notify chargeability to tax have been rather more serious than he may have anticipated – almost 200 times more serious!

David