Tag Archives: VAT

Confiscation and Trading Standards offences

Cumbria Trading Standards officerTrading standards officers these days deal with a wide range of offences.  Years ago trading standards work centred on checking that retailers were using correct weights and measures.  That is still an element of the work, but trading standards officers today also deal with scams, frauds, dishonest overcharging, trade mark and intellectual property offences and transgressions of the Consumer Protection from Unfair Trading Regulations 2008 and other legislation.

Consumer protection

The essence of trading standards work is the protection of consumers.  So it is not surprising that in criminal prosecutions trading standards departments will focus on the loss to the consumer.  That includes losses which the offender intended but failed, for one reason or another, to bring about.

For sentencing purposes it is unquestionably correct for the court to have regard to both the actual and the intended losses to consumers.

But a different approach is required in confiscation.

Confiscation

It should not be overlooked that the principal objective of confiscation is to deprive a wrongdoer of the financial benefit obtained by him from his criminal conduct.  Self-evidently benefit which the convicted defendant had intended to obtain but did not, cannot be the subject of a confiscation order.

But equally importantly, the focus of a confiscation order is on the benefit obtained by the convicted defendant – not on the loss suffered by the consumer.  As it was put succinctly in the case of R v Reynolds & Others [2017] EWCA Crim 1455 at para [58(vi)] “the amount lost by the loser is generally irrelevant”.

But how is the benefit to be established for the purposes of the confiscation provisions of the Proceeds of Crime Act 2002?

Benefit

The first step has to be the correct identification of the convicted defendant.  This is particularly important where there is more than one defendant (where it is necessary to determine if each element of benefit was obtained singly by one defendant or jointly by more than one) and where a limited company is involved (where it may be necessary to consider whether the corporate veil should be pierced or to differentiate between benefit obtained by the company and benefit obtained by a director or employee).

This may involve careful consideration of matters of fact and issues of law.

Of course when there is more than one convicted defendant quite separate s16 statements are required for each defendant.

The next step is careful consideration of the precise offence(s) of which the defendant has been convicted and – if possible ‘criminal lifestyle’ is in issue – the period of time over which each offence occurred, and the number of offences of which this defendant has been convicted.

It is sometimes the case that a defendant will be prosecuted for a number of individual offences but the trading standards officers regard these specific charges as merely representative of a more widely operated illegal method of business.

In assessing the benefit of ‘particular criminal conduct’ the court will have regard only to matters which have been the subject of a charge which has resulted in conviction (and other offences taken into consideration in sentencing).

Where the offences do not appear in Schedule 2 PoCA 2002 and the aggregate benefit obtained by a convicted defendant is less than £5,000 (in England and Wales) then that defendant will not be deemed to have a ‘criminal lifestyle’ and the statutory assumptions of s10 cannot be employed.

When quantifying the benefit obtained by a convicted defendant it may, depending upon the circumstances, be appropriate to use the amount of the his profits (i.e. net proceeds), permitting him to deduct the expenses incurred in supplying the goods or services in question.

It may also be necessary to reduce the amount of benefit in respect of VAT charged to the consumers and any amounts refunded to them.

For all these reasons the benefit obtained by the convicted defendant may be very much less than the losses suffered by consumers as a result of the criminal conduct in which he engaged, or even the amount referred to by the judge when sentencing him.

So what are the key points to remember?

Key points

For the prosecution, great care needs to be taken at the charging stage regarding who to charge (and, for example, whether to charge a limited company as well as charging a director), what offence(s) to charge, and how many charges to bring.

For the defence, it is important to challenge the s16 statement appropriately having regard to applicable statute and case law and the relevant facts.

In many trading standards cases it will be useful for the defence to instruct a forensic accountant to critically review the prosecution s16 statement.

Contacting us

Our contact details are here.

David

(Note: This article applies to confiscation proceedings under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation proceedings in particular cases which it is not possible to deal with in a relatively short article such as this. 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.)

Benefit in confiscation: gross receipts or profit?

Antique coin copyright David Winch 2014For many years lawyers acting in confiscation cases on behalf of convicted defendants have sought to limit ‘benefit’ for confiscation purposes to the ‘true benefit’ or ‘profit’ arising from the criminal activity – and for just as many years lawyers acting for the prosecution have sought to argue that the ‘benefit’ is the gross amount received. This article traces the development of this argument through the history of the various different Acts of Parliament which have provided for confiscation and right up to the present.

 

Drug Trafficking Offences Act 1986

One of the earliest cases to focus on the issue of gross receipts or profits in confiscation was R v Smith (Ian) [1989] 1 WLR 765. This was a drug related confiscation under the provisions of the Drug Trafficking Offences Act 1986. The defendant’s counsel argued that the benefit should reflect only the profit derived from drug trafficking. The Court of Appeal countered, “it seems to us that the section is deliberately worded so as to avoid the necessity, which the appellant’s construction of the section would involve, of having to carry out an accountancy exercise, which would be quite impossible in the circumstances of this case”.

It is true that the wording of the relevant Act referred to “any payments or other rewards received by a person . . . in connection with drug trafficking carried on by him or another”. It is difficult to see how these words could be considered to refer to the profit from drug trafficking rather than the gross amounts received.

 

Drug Trafficking Act 1994

But the Smith case set the tone for many subsequent confiscation cases. So, for example, in the case of R v Banks [1996] EWCA Crim 1799, a drugs case based on the confiscation provisions of the Drug Trafficking Act 1994, the Court of Appeal reaffirmed the decision in Smith. Again it may be relevant that the 1994 Act had repeated the wording of the 1986 Act with regard to “payments or other rewards received”.

 

Criminal Justice Act 1988

Away from drug offences, confiscation had been introduced more generally by the Criminal Justice Act 1988. The provisions of that Act were consider by the House of Lords in R v (David Cadman) Smith [2001] UKHL 68. This case concerned evasion of duty on the import of cigarettes. In that respect issues of what had actually been received were sidelined, since the benefit for confiscation purposes was held to be the duty which had not been paid – rather than any monies which had actually been received.

But the House of Lords took the opportunity to refer with approval to the 1989 judgment in Smith – indicating that legislators had “adopted a similar approach” in relation to drug related and non-drug related confiscations, notwithstanding the different form of words used in the 1988 Act.

 

Proceeds of Crime Act 2002

Some years later, in the case of CPS Nottinghamshire v Rose [2008] EWCA Crim 239, the Court of Appeal gave detailed consideration to the separate strands of confiscation legislation in respect of drug offences and non-drug offences, and the newer legislation in the Proceeds of Crime Act 2002 dealing with confiscation in relation to all types of offences.

Whilst the Court of Appeal did not consider that when drafting PoCA 2002 the legislators had chosen to adopt the confiscation provisions from one branch of earlier statute law rather than another, it did consider that “it can safely be assumed that Parliament did not intend to weaken the application of the confiscation regime (or regimes) when bringing the existing provisions within a single framework”.

 

Confiscation and business activities

The Court of Appeal decision in the case of R v Scragg [2006] EWCA Crim 2916 had dealt with confiscation in relation to a (relatively) legitimate business. Mr Scragg bought and sold motor cars. But Mr Scragg was dishonest and he was convicted of ‘fraudulent trading’ contrary to s458 Companies Act 1985. In the confiscation proceedings which followed under the Proceeds of Crime Act 2002 the question arose, “where a defendant obtains by deception a vehicle valued at £10,000 and sells it for £8,000, how is his benefit to be quantified?”.

It was not suggested that only Mr Scragg’s profit was his benefit – rather the issue was whether his benefit in relation to that purchase and sale would be £10,000 or £18,000. The Court of Appeal found his benefit to be limited to the greater of the purchase price and the sale price in respect of each vehicle (so the benefit would be £10,000 in respect of the car in this example).

 

Gross receipts

But one needs no imagination to see that the implications of confiscation for a business could be harsh indeed. This is graphically illustrated by the decision in Del Basso & Goodwin v R [2010] EWCA Crim 1119 which concerned a business offering long term car parking on land not far from Stansted Airport. The business was a legitimate one except that it was carried on in contravention of an enforcement notice stemming from an absence of any planning permission for the land in question to be put to that use.

The confiscation order in that case was based on the gross receipts of the business – not on the profits arising. In arriving at that conclusion the Court of Appeal referred to the House of Lords decision in R v May [2008] UKHL 28 in which, when summarising the key features of confiscation their Lordships had said, “the benefit gained is the total value of the property or advantage obtained, not the defendant’s net profit after deduction of expenses”.

In the case of R v Waya [2012] UKSC 51 the Supreme Court, consistent with May, had noted that, “a legitimate, and proportionate, confiscation order may . . . require a defendant to pay the whole of a sum which he has obtained by crime without enabling him to set off expenses of the crime”.

 

Accounting exercises unwelcome

More recently in the case of R v Harvey [2013] EWCA Crim 1104 the Court of Appeal upheld a confiscation order based on a percentage of all gross receipts of a business notwithstanding the fact that those gross receipts included some demonstrably legitimate sums and Value Added Tax on invoiced sales, which had been properly accounted for to HM Revenue & Customs. The court commented that, “it is repugnant and contrary to the principles stated in May paragraph 48 and Waya paragraph 26 to carry out an accounting exercise in respect of those monies” obtained as a result of criminal conduct.

From this history it might appear that courts in England & Wales have taken a consistent, and harsh, line that confiscation orders are to be made on the basis of the gross amounts obtained as a result of, or in connection with, crime.

 

A softer line?

But there is an alternative and more nuanced interpretation.

In the case of Waya the Supreme Court acknowledged that there may in some circumstances be a danger of a disproportionate outcome which, “will have to be resolved case by case as the need arises. Such a case might include, for example, the defendant who, by deception, induces someone else to trade with him in a manner otherwise lawful, and who gives full value for goods or services obtained. He ought no doubt to be punished and, depending on the harm done and the culpability demonstrated, maybe severely, but whether a confiscation order is proportionate for any sum beyond profit made may need careful consideration”.

 

Confiscation and profits

Perhaps illustrating that approach, the Court of Appeal in R v Sale [2013] EWCA Crim 1306 allowed an appeal against a confiscation order based on the total receipts generated from contracts obtained illegally and substituted an order based on the gross profits arising from those contracts, noting that, “it would have seemed to us proportionate to limit the confiscation order to the profit made”.

In that case the court would also have wished to reflect in the confiscation order, “the pecuniary advantage gained by obtaining market share, excluding competitors, and saving on the costs of preparing proper tenders” but it had no information enabling it to uplift the confiscation order to reflect this aspect of the “true benefit” obtained by the defendant.

 

True benefit

But, arguably at least, the cases of Waya and Sale have opened the door for defendants in future confiscation proceedings in some cases to ask Crown Courts to restrict the confiscation order to be made against them to the ‘true benefit’ obtained from their criminal conduct rather than the gross amounts obtained, in order to arrive at a confiscation order which is proportionate and compliant with Article 1 of the First Protocol to the European Convention on Human Rights.

 

A fuzzy line

It might be said however that the effect of recent decisions has been to create some uncertainty. On first sight it seems difficult to reconcile the full-bloodied and harsh outcome in Harvey with the more generous approach adopted in Sale in circumstances where both cases related to essentially legitimate business activities tainted by an illegitimate ingredient. It will be interesting to see how these types of cases are dealt with in future.

David

 

UPDATE:  Since this article was written the Court of Appeal has dealt with the case of R v King [2014] EWCA Crim 621.  It was argued on behalf of the defendant, on appeal, that following the logic in Sale the defendant’s benefit should have been based on his profit from trading in used cars rather than his gross receipts.  The selling of used cars was not of itself criminal activity, it was argued.  Mr King’s offence was in purporting to act as a private individual rather than as a motor trader when selling 58 cars (and thereby attempting to sidestep consumer protection legislation).  However, with one exception, the purchasers had apparently been satisfied with the cars they had purchased from him.  His appeal was dismissed.  The Court of Appeal found that Mr King’s benefit was the gross amount received and that “this business was founded on illegality”.

It may be considered however that in Sale, since the contracts in question were obtained by illegal bribes, it might equally have been said that the gross receipts were “founded on illegality”.  To the writer it remains far from clear in which circumstances the court will consider it appropriate to restrict the amount of the confiscation order to the profit arising.  There appears to be no hard and fast line nor a single determinative factor and, as the Court of Appeal noted at paragraph [32] of King, “cases differ to a great extent”.

 

FURTHER UPDATE:  See my later article Confiscation & legitimate businesses for further discussion of this topic.

(Note: This article applies to confiscation orders under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation order in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)

Criminal lifestyle confiscation and output VAT

The Court of Appeal have recently handed down a judgment in the ‘criminal lifestyle’ confiscation case of R v Harvey [2013] EWCA Crim 1104.

This was a case in which I had been instructed by the defendant’s solicitors in the confiscation proceedings in the Crown Court.

 

Background

The defendant was a director and majority shareholder in a limited company engaged in hire of plant and equipment (sometimes with drivers, sometimes just the plant itself).

A number of items of plant used by the company were found to be stolen property and the defendant pleaded guilty to 9 counts of ‘handling’ contrary to s22 Theft Act 1968.  A further 30 counts were left to lie on the file.

The defendant was subject to confiscation under PoCA 2002 on the basis that he had a ‘criminal lifestyle’ and that the veil of incorporation of the company should be pierced.

 

Benefit for confiscation purposes

The prosecution contention initially in a statement under s16 PoCA 2002 was that the entirety of the gross receipts of the company (inclusive of VAT) since the ‘relevant day’ constituted assumed ‘benefit’ of the defendant for the purposes of confiscation.

By the time of the hearing in the Crown Court the prosecution had changed its position.  Whilst it was unable to put a figure on the proportion of company receipts which were derived from criminal conduct, it was significant that the police had inspected 91 items of plant (both large and small) and considered 39 of those items to be stolen property (that is approximately 42.8% on an ‘item count’ basis).

 

The decision in the Crown Court

At Crown Court the judge held that 38% of the company’s gross receipts (inclusive of VAT) since the ‘relevant day’ were to be regarded as ‘benefit’.  Those gross receipts included not just trading income but also receipts from the sale of plant.

This 38% figure was based on the 42.8% on an ‘item count’ basis, reduced to recognise the greater earning power of the (legitimate) larger and more expensive items of plant.  The judge concluded that the defendant had known that all 39 items of plant (not just the 9 items in relation to which he had pleaded guilty to ‘handling’) were stolen property.

The Crown Court judge did not accept that he should be guided by a detailed analysis of a representative sample of company sales invoices over the period since the ‘relevant day’ which appeared to show a much smaller proportion of the company’s income was derived from the stolen plant.  He concluded that the defendant was dishonest and his company records did not reflect the entirety of the transactions of the business and so figures based on company records were not persuasive.

The benefit found by the judge was calculated accordingly at approximately £2.2m (based on the value of the 39 stolen items plus 38% of gross receipts of the company since the ‘relevant day’) and he set a default term of 10 years.

 

The appeal to the Court of Appeal

The defendant appealed on the grounds that:

  1. VAT charged to customers and accounted for to HMRC should be excluded from the gross receipts figure.
  2. Stolen plant had been recovered by the police and returned (sometimes after many years of use) to its rightful owners, but no reduction had been made in the benefit figure to reflect this.
  3. The 38% figure was too high on the facts and, in particular, had been applied to all receipts including demonstrably legitimate income from the sale of legitimately acquired plant.
  4. The default sentence of 10 years was excessive.

The Court of Appeal reduced the default term to 8 years but otherwise upheld the confiscation order in full, dismissing the appeal on each of the first three grounds.

The Court of Appeal took the opportunity to review and comment upon various confiscation cases – some very recent, some older – in the light of the decision of the Supreme Court in R v Waya.  In particular the Court of Appeal opined that the decision in R v Del Basso and Goodwin [2010] EWCA Crim 1119 now “does seem excessively harsh and may arguably be characterised as disproportionate”.

Defendants and accountants may be disappointed to note the Appeal Court’s decision (even after the Waya case) that output VAT charged on the (assumed) illegitimate receipts of a legitimate business is to be regarded as a component of benefit in a ‘criminal lifestyle’ confiscation – even where that output VAT has been properly accounted for and paid over to HMRC.  The Court of Appeal considered that there was nothing in Waya which called into question the manner in which the Court of Appeal in Del Basso dealt with VAT and that therefore Del Basso was binding authority on that point.

But the Court of Appeal in any event approved this approach, commenting, “It would be wrong in principle to carry out an accounting exercise in respect of VAT which [the business] collected through the use of stolen property”.  The total monies paid by customers, including the VAT charged, constituted property obtained by criminal conduct.

[UPDATE:  On 16 December 2015 the UK Supreme Court upheld Mr Harvey’s appeal against this element in the calculation of his benefit for confiscation purposes.  The UKSC held that where VAT has been accounted for to HMRC it would be disproportionate under A1P1 to make a confiscation order calculated on the basis that the VAT, or a sum equivalent, was “obtained” by the defendant for the purposes of PoCA 2002.]

The Court of Appeal’s view must, by implication, be taken to be that they did not consider the confiscation order of £2.2m to be disproportionate in all the circumstances.

David

(Note: This article applies to confiscation orders under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation order in particular cases which it is not possible to deal with in a relatively short 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“.