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An illegal trade - tax consequences?

It transpires that a client has been lending money without a licence, for about six years. We knew nothing about this, and since it was apparently in cash and it seems every penny was reinvested rather than spent, there was effectively nothing to pick up on. It started very small and grew.

The situation has come to light after a Customs raid on a completely different matter (!) that turned up the loan books. 

A court case is in the process, but we are wondering about the tax consequences.

We are told that the loan business was profitable whilst being carried out, with the loan balances quadrupling in the six years of trading (so around 400% return over six years). However now that the whole matter is out in the open the authorites have told him that as he does not have a licence, will not get a licence, and hasn't the correct loan documentation in place, he is not allowed to try and collect his debts, so virtually everything is lost (profits and initial capital).   

HMRC are not aware of any of this yet, or if they are they haven't said anything. There's little doubt that they will become aware we think.

So what plan of action is suggested, and what is the tax situation?

Our understanding is that profits from a trade are taxable, regardless of whether legal or illegal. So what about the loss at the end - is this allowable for tax also?

What's the best way to come clean to HMRC in advance?

  

Replies

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03rd Jan 2013 16:15

Hmm

Only skim read it, so apologies if it is not appropriate, but have a read of http://www.taxation.co.uk/taxation/Articles/2012/07/11/43471/diamond-geezer

I wonder though, can what your client has done be called a trade?  Fencing stolen TVs is almost identical to selling legit TVs, so both are trades.  But if you can't make a loan without a license...

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By Glennzy
03rd Jan 2013 16:55

A one for Peter Winch

This could be one for Peter Winch as if he is an illegal loan shark it could trigger some POCA interest.

 

 

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03rd Jan 2013 18:38

or David Winch

perhaps?

 

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By pedant
03rd Jan 2013 17:36

It's a trade

Notwithstanding that it's illegal.

 

http://www.hmrc.gov.uk/manuals/bimmanual/BIM20050.htm 

 

(At least in HMRC's opinion)

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03rd Jan 2013 18:33

Will there be a profit ?

It is possible that everyone who ever had a "loan" will be entitled to a refund of any interest and charges. as he wasn't authorised to charhge interest.  Plus as you say, outstanding loans cannot be legally collected.

My guess is that all that will add up to a loss not a profit.   

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03rd Jan 2013 22:47

Illegality

The criminal investigation & prosecution authorities take a fairly straightforward line on money lending.  If you have the appropriate Consumer Credit Act licence they will regard it as legal (whatever rate of interest you charge and whether or not all the paperwork is correct - but of course the customer may resist being obliged to repay in the civil courts if the paperwork is faulty).

If you do not have a licence then the lending is illegal and you may be prosecuted for it.

Of course illegal money lenders may or may not be the sort of people who will warn you of 'unfortunate consequences' if you do not pay up on time - but generally getting evidence of threats or of actual violence which stands up in court is difficult.  So the authorities resort to the 'licence' v 'no licence' approach referred to earlier.

Your guy is in the "no licence" category and will be treated accordingly.

As far as tax is concerned there are lots of people who make taxable income illegally.  A few examples: a landlord renting property without meeting local authority requirements; a tattoo artist or scrap metal dealer or taxi driver trading without the necessary licence - as well as the more obvious examples of drug dealers, etc.

The profits can be taxed either by HMRC under the routine income tax legislation, or by SOCA under Part 6 of Proceeds of Crime Act 2002.  In either case the normal rules about income and deductions apply.

This guy would appear to have suffered a terminal loss in his final period of trading and loss relief would be available for that.

However (if he is convicted in due course) he may also find himself subject to confiscation in the Crown Court on the basis that he has a 'criminal lifestyle' and that could wipe him out financially.  In the circumstances HMRC / SOCA are unlikely to want to pursue him for tax if he has no money or assets.

You might like to discuss with the client making some contact with HMRC on his behalf and suggesting that they let matters lie until the criminal proceedings (including any confiscation) have been completed (which is a process which may well take some years).

Of course do not let a lot of unpaid fees or WIP run up - if he gets clobbered in the Crown Court he will be unable to pay you.  His assets may already be frozen by a 'restraint order' under s41 PoCA 2002.

Are Customs also pursuing the original line of enquiry which initially brought your client to their attention?

As always you need to consider your obligations concerning a possible Suspicious Activity Report under MLR 2007 / s330 PoCA 2002.

David

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By newmoon
04th Jan 2013 16:48

Thanks to everyone for their replies ...
and to David Winch for the very comprehensive advice.
I'm aware that some of his assets are already frozen.
We have also been liaising with his solicitor.
We will take steps to cover our fees, and will discuss your recommended strategy with HMRC.
Thanks.

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04th Jan 2013 23:33

Restraint orders are normally worded so as to freeze ALL assets of the defendant (whether identified or unidentified and whether in the UK or overseas) but then allow him to draw a fixed amount each week / month to live on (typically £250 per week).  So bear in mind that he may have to pay your fees out of that rather limited available 'income'.

Alternatively the solicitor may apply to the court for permission to pay your fees from restrained funds - but the prosecution may object to that and you should not expect that the judge will be sympathetic to you!

David

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06th Jan 2013 11:18

there was a case of a bloke who ran a security agency for several years, even providing staff to  hospitals and functions run by the police.

He did this before licensing requirements came into force, and for years afterwards....employed loads of people and had a little ofleet of liveried vans running around.

After several years it turned out he had a undeclared conviction and his licence was declared invalid. SOCA then went after him for 'criminal lifestyle'.....presumably 'because they could'

 

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