Appeal court upholds VAT confiscation

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England and Wales Court of Appeal recently ruled on the appeal of a criminal lifestyle confiscation and output VAT case, which accountants may find "disappointing", according to David Winch.

In the case of R v Harvey [2013] EWCA Crim 1104in April 2012, director of plant hire company JHL, Jack Harvey, was convicted of handling items of stolen plant and using them in his company.

He was ordered to repay around £2.2m and a default prison term should he not pay of 10 years was set.

The judge ruled that 38% of the company’s gross receipts, including VAT, since the relevant day in November 2003...

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Comments

VAT    2 thanks

Derekat | | Permalink

Does this then mean that the VAT Paid over is the proceeds of crime and should be recoverable?

If the proceeds of crime are used to buy an asset the asset is recoverable. If the proceeds of crime are used to better a criminals tax position it should be recoverable.

In this case the gross has been paid but the criminal wasn't entitled to any of it. So surely the revenue then isn't entitled to receive it.

Technically the victims should be paid the gross revenue which we assume will only ever be part of the loss. As its compensation surely the VAT element is inclusive and just part of the gross, not a separate entity that is accountable to the revenue. After all the victim has not provided goods or services, they were provided using his equipment unlawfully without his knowledge and he is being compensated (in Part) for his loss.

davidwinch's picture

How it works    2 thanks

davidwinch | | Permalink

Let's take a worked example.

Noddy runs a legitimate plant hire business. He obtains a cement mixer on the cheap knowing it to be stolen. Actually it has been stolen from Big Ears and is worth £1,000 at the time it is stolen.

Noddy rents out the cement mixer and over a period of years gets £2,000 plus VAT (£2,400 gross) in hire charges. Noddy accounts for the output VAT in the normal way.

The police raid Noddy's yard and discover the stolen mixer which they identify and return to Big Ears' insurance company. The mixer is now worth only £500.

The result is that Noddy is subject to a confiscation order for £3,400 (being the £1,000 value of the cement mixer plus the £2,400 received from the hire of it). Noddy is obliged to pay this £3,400, in effect, to the government (like a fine).

Big Ears had claimed the £1,000 value of the stolen mixer on his insurance and so now the insurance company get the mixer.

Does that clarify the position?

David

Win win for the Government

suesimkiss | | Permalink

Win win for the Government then! £400 in output tax plus a "fine" of £3400!

Yes, but

jonbryce | | Permalink

It clarifies the position.  I know you've written about this case before, and that's how the rules seem to work.

However, I would argue that the criminal benefit ought to be £2000, not £3,400.

If you collect VAT from a customer and hand it over to HMRC then that I would argue is not proceeds of crime.  Income from criminal activity is taxable.  If you received the £400 and didn't hand it over to HMRC then that would be proceeds of a separate crime of tax evasion.  He didn't evade tax, therefore it isn't criminal proceeds.

Secondly, the value of the cement mixer represents the current value of future cashflows that it will generate for the business.  By adding both the current value - £1000 + the future value - £2000 (+ residual value of £500), you are double counting.  What he actually received was the £2000, not the £1000 he ought to have paid up-front in order to be legitimately entitled to that income.

Of course the courts don't agree with me, so I will just have to remember that what you explain is the way the rules do work in practice, even if it isn't how I think they should work.

carnmores's picture

i agree

carnmores | | Permalink

the judges are at it again making it up as they go along . it is preposterous that the VAT collected and paid over should be subject to a further penalty. parliament could quite easily deal with this and should

Very interesting and,    1 thanks

Brend201 | | Permalink

Very interesting and, disappointing from an accounting point of view.  However, from the point of view of law-abiding, tax-compliant citizens, I am a bit less troubled.  

So, how do we get the message out to people that if they misbehave, the penalties could be harsh and theoretically unfair?  Would it be more likely that a criminal would think that if you use stolen goods in a business, you would be better off to evade tax on the associated income too?

 

carnmores's picture

no no

carnmores | | Permalink

JURISPRUDENCE IS IMPORTANT the remedies of the state must be fair thats the deal

Tom 7000's picture

Advice to clients    1 thanks

Tom 7000 | | Permalink

should we now advise client with stolen property that they dont have to charge vat on it when they hire it out?

davidwinch's picture

Payback

davidwinch | | Permalink

The police, media and others in referring to confiscation cases often say the convicted individual has "to repay" or to "pay back" what he gained from the crime.

As this case illustrates, the way that confiscation works it does much more than simply put the individual back into the position which he would have been in if he had not committed the crime.

Taking the worked example of Noddy, he lost the cement mixer, and the £1,000 value of it when he stole it, and whatever he paid to buy it, and the full hire charges he 'earned' from it, and the VAT (which had already accounted for once, to HMRC).  So he is clearly worse off than if he had never had it.

The courts accept that confiscation should not operate as an additional fine or punishment (as the individual will have been sentenced already for his offence).  But they also accept that confiscation quite properly acts as a "deterrent penalty".  One might say that it takes a skilled legal mind to distinguish a "fine" from a "deterrent penalty"!

The Supreme Court recently ruled that confiscation orders must not be "disproportionate" but made it clear that a confiscation order is not to be regarded as disproportionate simply because it takes from a convicted individual more than his profit from his crime.

And all that does not begin to address issues of assumed benefit where an individual is deemed to have a 'criminal lifestyle'.

So there is a debate to be had as to whether confiscation is fair and just - and whether (given that it applies to convicted criminals) society should, or should not, require that it must be fair and just.

David

A bad day in Toyland

Derekat | | Permalink

Enid Blyton Wrote  "Let's take a worked example. Noddy runs a legitimate plant hire business. He obtains a cement mixer on the cheap knowing it to be stolen...........  The point .... is the VAT the proceeds of crime or not? The evidence you have put forward says its not. You say that the even though the digger has been nicked by the Goblins and hired out by Noddy the VAT has been passed over legitimately. Further evidence is that the Revenue are keeping it. Lack of sympathy aside there is no reasonable argument to justify that Noddy pays the VAT. Who did the VAT get nicked from? Mr Sparks got what he paid for when he hired the digger.    The Vat was paid over.     The digger was paid out on insurance. So why the double helping of VAT.     Further more we have to assume from Noddy's attention to accounting detail that he wouldn't have been able to avoid corporation tax on the deal if he made a profit so perhaps we should be deducting that as well.. Or perhaps Noddy should claim it as a legitimate business expense and take it to appeal when its rejected for a free trial. .It's no more outrageous than the compensation order. Might give him something to focus on while he is waiting for Tessie Bear to turn up on a visit. 

davidwinch's picture

What the law says    1 thanks

davidwinch | | Permalink

Well Noddy's problem is the law - in the shape of s76(7) PoCA 2002 - which says "If a person benefits from conduct his benefit is the value of the property obtained".

In this context "property" means an asset of any description (so it includes money).

The Courts say the property that Noddy obtained "as a result of or in connection with the [criminal] conduct" - s76(4) - was the cement mixer and the VAT inclusive hire charges.

The Courts and the lawmakers do not seem keen to get into the nitty gritty figurework that would be required if they aimed only to take off the individual what he had gained from his crime - they would rather keep it simple and look at what he received and take that.

So there is a logic to what the courts have done - but is it fair?

David

What will I do while I'm inside. I know an Uman Riights Claim

Derekat | | Permalink

The government can't  have it both ways. If the Gross is considered to be the proceeds of crime then the VAT that's been handed over is the proceeds of crime.  It was the proceeds of crime at the point of exchange. If he passed the VAT to me because he owed me money, would I be able to keep it? Of Course not I would be told I was in possession of the proceeds of crime.  So how does passing it to the revenue, because its owed, differ.

 

johnjenkins's picture

I always thought

johnjenkins | | Permalink

VAT was a tax that tax payers collected on behalf of HMRC. Taking your logic David, if VAT has erroneously been collected then HMRC are legally obliged to hand it back to those that paid it out. It would be interesting if someone did take HMRC to court for the VAT.

The Court of appeal have got it wrong big time. Confiscation means taking away what you have benifited. What about the repairs and fuel for the machinery?

The Courts don't have to get into loads of figure work if they want to penalise they can do it as a fine or whatever for being a naughty boy. As someone says they seem to be making it up as they go along. Certainly a case for uman rights.

davidwinch's picture

The courts' approach

davidwinch | | Permalink

There are no Crown Court judges or Appeal judges on here so I will endeavour to put their view on their behalf in the interests of fairness and balance.

 

 

The purpose of confiscation is to strip offenders of the fruits of their crimes.

In many cases it will be impossible to reliably quantify this.  Therefore the legislation, enacted by parliament, takes a sensible approach - which is proportionate to the aims of the legislation - of requiring courts to look at what has been 'obtained'.

That does not refer to 'profit', nor does it refer to what is 'retained'.  The aim of the legislation is not to require the criminal courts to undertake an accounting exercise in order to arrive at the confiscation figure.

It would be wrong in principle and morally repugnant for the courts to get involved in accountancy exercises focussing on the details of criminal activities of convicted defendants.  Equally it would be wrong to allow a convicted defendant to obtain 'credit' for expenses he incurs in carrying out his crime.

Focussing on what is obtained does naturally mean that a defendant may suffer a confiscation order in an amount in excess of his profit from crime.  For example, if X and Y jointly steal, say, £10,000 then each of them has (in law) obtained the whole of that £10,000 and so each may be subject to a confiscation order for £10,000.  There is nothing unjust in that - even though ultimately the state recovers more than the loss.

In the same way if M steals £10,000 and passes it on to N (who knows it to be proceeds of crime), then M and N may each be subject to a confiscation order for £10,000 and that is not unjust, since each has obtained £10,000 from criminal conduct.

So long as a confiscation order is not disproportionate to the objectives of the legislation then it does not infringe the human rights of the person against whom it is made.

 

 

David

johnjenkins's picture

I understand the concept

johnjenkins | | Permalink

of jointly and severally, however I would say that the confiscation order was disproportionate to the objectives of the legislation and I am also sure that (looking at the recent reasons why the court of uman rights decided life sentences infringe) VAT (as it is a tax) cannot be taken into consideration for confiscation purposes.

In effect the VAT element was not the builders money he was just collecting it on behalf of HMRC.

Noddy's Plant Hire Company - the official receivers!

wingco44 | | Permalink

I've never trusted Big Ears. And Noddy hasn't the sense he was born with.

Surely if the Court has ruled that the recovered VAT is the proceeds or illegal activity, HMRC are in receipt of stolen goods?

Still, it seems a very harsh judgement but in order to deter others perhaps it is a good idea as long as theives read Accounting Web (no dispersions intended) - this case hasn't exaclty ousted Katie Price, Kerry Katona or Helen Flanagan from the tabloids, has it? (unfortunately).

Noddy Complains to Mr. Plod (The Noddy Shop Book No. 4)

Derekat | | Permalink

Hooray someone is keeping up with the discussion. HMRC has the proceeds of crime. So lets look at who it should be paid back to. Not the hirer as he got what he paid for. So it should be returned to the company/person that paid it over. That might seem odd but its actually oddly equitable.

davidwinch's picture

@johnjenkins    1 thanks

davidwinch | | Permalink

All I can say is that the Court of Appeal clearly did not consider that the confiscation order was disproportionate even in the light of the defendant's arguments.  (My personal view differs from theirs!)

The basis for the order was that the defendant 'obtained' the money he received from customers (which of course is inclusive of VAT).  The money he received all went into the same 'pot' from which he later paid HMRC when he made his returns.

I suppose that had it been possible to show that he received the output VAT on trust to account to HMRC for it then it could have been argued that he did not truly 'obtain' that money.  But of course output VAT is not legally held 'on trust' it just forms part of the general funds of the business.

David

carnmores's picture

thank god there are no judges on here

carnmores | | Permalink

They would completely lower the tone of the debate

johnjenkins's picture

@David

johnjenkins | | Permalink

I'm not convinced that VAT forms part of general funds. I will dig deeper though. My understanding of VAT is that it is a tax due to HMRC. The tax payer is allowed to use that money until the due date in return for collecting it on behalf of Customs and Excise. So whichever way you look at it HMRC have received the proceeds of crime. Taking that one stage further, tax payers have received the proceeds of crime. No wonder the courts don't want to get into the nitty gritty.

jndavs's picture

Proceeds of crime

jndavs | | Permalink

So do report HMRC to SOCA?

 

I bet Noddy also claimed capital allowances, is there no end to his deviousness?

johnjenkins's picture

If I thought

johnjenkins | | Permalink

for one moment SOCA would even look at my report I might be tempted.

Now when Customs and Excise confiscate fags, booze etc. they destroy them. Food for thought.