Supreme Court confirms that when making a confiscation order and assessing the amount of benefit obtained by an offender any VAT accounted to HMRC should be ignored

In R v Harvey [2015] UKSC 73, the Supreme Court allowed the appeal of Mr Jack Harvey (the Appellant) against the decision of the Court of Appeal (Criminal Division)

and confirmed that when making a confiscation order, and assessing the amount of benefit obtained by an offender within the meaning of section 76(4) of the Proceeds of Crime Act 2002 (POCA), any VAT paid or accounted for to HMRC, should be ignored.

Background

JFL Harvey Limited (JFL) was formed in 1972 and was concerned with plant hire and contracting. The Appellant owned 98.9% of the shares in JFL and the remainder was held by his wife. As such, JFL was treated as the Appellant's alter ego.

The Appellant was convicted of nine offences relating to the handling of stolen plant and machinery and arson of a competitor's machinery. He was sentenced to nine years and six months imprisonment.

After trial, the Crown Prosecution Service asked the Crown Court to proceed under section 6 of POCA, setting in motion confiscation proceedings.

The Crown Court assessed the benefit obtained by the Appellant at £2,275,454.40, comprising £1,960,754.40 from general criminal conduct and a further £314,700. Of this, the £1,960,754.40 was calculated on the basis that the proportion of stolen items to the total stock over the relevant period was 38% and JFL's aggregate turnover for the relevant period was £5,159,880 (inclusive of VAT). Accordingly, a confiscation order was made in the sum of £2,275,454.40.  

The Appellant was given six months (later extended to 12 months) to pay, and was ordered to serve ten years (reduced to eight years by the Court of Appeal) in default of payment. 

The Appellant appealed the decision of the judge to include the amount of VAT paid to HMRC, in the £5,159,880 figure. 

The Appellant appealed to the Court of Appeal where he submitted, amongst other things, that the Crown Court had erred in failing to deduct from the turnover figure the amount of VAT received by the Appellant from customers before proceeding to assess how much of the turnover was attributable to his general criminal conduct. 

The Appellant argued that three quarters of the £843,827 of VAT collected was accounted for and expended upon the purchase of goods and services and therefore he should be given credit for the VAT element of these purchases. Applying the principles of R v Del Basso and Goodwin [2010] EWCA Crim 1119 and R v Waya [2012] UKSC 51, the Court of Appeal concluded that it would be wrong in principle and repugnant to carry out an accounting exercise in respect of those monies. The Appellant had used the proceeds of criminal conduct to purchase goods and services and it was wrong in principle for the Appellant to be given credit in respect of the VAT element of those purchases. 

In the alternative, the Appellant submitted that of the VAT collected by JHL, £200,745 had been paid to HMRC. This contention was also rejected by the Court of Appeal, for the same reasons. 

The Appellant appealed to the Supreme Court, where he submitted that:

i) the benefit of the VAT sum was never obtained by him as it was declared and paid to HMRC;

ii) in the alternative, even if he had obtained the VAT element, his interest was nil; or

iii) should i) and ii) be wrong, a confiscation order which does not account for VAT already paid to HMRC is disproportionate. 

The Appellant argued that the VAT was a mandatory inclusion in his price which was state imposed and therefore he was collecting on behalf of the state. He argued that the recovery through the VAT regime and the confiscation order would lead to double recovery. This was in breach of his right, under Article 1 of Protocol 1 to the European Convention on Human Rights (A1P1), implemented in the UK through the Human Rights Act 1998, to the peaceful enjoyment of his possessions.   

Supreme Court's judgment

The Supreme Court allowed the Appellant's appeal (Lords Hughes and Toulson dissenting as to the effect of A1P1). 

The Supreme Court said that as a matter of ordinary statutory construction, in deciding the benefit obtained within section 76(4) POCA, the VAT paid or accounted for to HMRC was not to be deducted as such deduction would be incompatible with the plain language of the sub-section. It was a core feature of the scheme of post-conviction confiscation that the scheme struck at the gross value of money, or other property obtained as a result of, or in connection with, the relevant criminal conduct. A person obtained money or property if he became the owner, or assumed ownership of it. JHL had been the legal owner of the money held in its bank account.     

Any statutory provision allowing the executive to effect double recovery from an individual, although not absolutely forbidden by A1P1, was at risk of being found by the courts to be disproportionate. Although sums payable under POCA were intended to be a deterrent, they were not intended to be punitive. Where the proceeds of crime were returned to the loser, it would be disproportionate to treat such proceeds as part of the benefit obtained by the defendant as it would amount to a financial penalty which should not be imposed through POCA. Given that VAT is collected by a taxpayer, the instant position was similar to that of property restored to the victim and the policy behind the principle was in part that a defendant who made good a liability to pay should not be worse off than one who did not. To take the same proceeds twice would not serve the legitimate aim of the legislation and would be disproportionate. 

The risk of double recovery through the Value Added Tax Act 1994 and POCA was disproportionate under A1P1. An individual collecting the VAT element of any transaction was doing so on behalf of HMRC, resulting in the notion of fiscal neutrality. It could not be denied that the Appellant had accounted for all of the input tax that he was liable to his suppliers. A double payment of that sum would be penal. As a defendant of criminal proceedings who had discharged his legal obligations to HMRC, he should not be worse off than a criminal who had not. Although their Lordships accepted that this would require the court to engage in an accountancy process in calculating the sums to be deducted, this should not be a reason to breach the Appellant's A1P1 rights.    

Lords Hughes and Toulson disagreed with the majority on this issue. In their view, JFL had not been a mere custodian of the VAT for the state and all of the money received by JFL was its money. It was not disproportionate to treat the entirety of JFL's receipts from its criminal conduct as having been obtained by the Appellant. 

Comment

The majority view that recovery through the VAT regime and a confiscation order would lead to double recovery and that this would contravene the Appellant's  rights under A1P1 to the peaceful enjoyment of his possessions, is to be welcomed. As their Lordships said in their judgment, a confiscation order is intended to be a deterrent and not punitive.  HMRC normally seek a confiscation order following a successful prosecution for tax evasion and this case illustrates how difficult an exercise it can be for the courts to determine the correct sum to be included in a confiscation order.   

For the full judgment please click here.