Newcastle United has lost a case against HMRC in which the football club wanted search warrants executed in April of this year to be declared unlawful and quashed.
The high court found that HMRC’s warrants to search the premises of Newcastle United Football Club for evidence of tax evasion were “lawfully issued” (Newcastle United Football Club v HMRC, 2017 EWHC 2402).
Suspected sham arrangement
The case relates to April 2017, when officials raided Newcastle United’s St James' Park, directors’ homes and the London club West Ham United, with the clubs suspected of carrying out a £5m sham contractual arrangement fraud.
The investigation, codenamed ‘Operation Loom’, concerned allegations of payments made by the club to football agents, but were allegedly transferred to intermediaries to minimise income tax, NIC and VAT obligations. Officers confiscated 275 files and 19 digital items from the Newcastle raids alone.
Warrants ‘excessively wide’
Last week’s case was not about the case itself, but whether the raids were legal and justified. In June 2017 Newcastle brought a judicial review application about the raids, alleging that the warrants were “excessively wide”, and that the due legal procedures to obtain them were not followed.
During the hearing, HMRC's representative confirmed that the judge issuing the warrant was not presented with the full evidence backing HMRC's theories, had not tried to obtain this material and did not give any written reasons for his decision to issue the warrants.
Another interesting detail to the case was that the judge was only given 45 minutes to read the application in full.
Case ‘materially correct’
However, two high court judges in Leeds ruled that HMRC’s case was 'materially correct', with the judges satisfied that HMRC's undisclosed evidence provided “reasonable grounds” that the club was engaged in criminality – in this case, reasonable grounds did not mean any criminal offence had in fact been committed, but that there is a case for Newcastle to answer.
According to the ruling, the lack of written reasons for granting the warrant was “unfortunate but not fatal”, and the reasons could be deduced from HMRC's own submission.
“We reject the argument that HMRC should have disclosed to the judge the evidence on which it asserted its belief that NUFC was involved in criminal activity ... In the event, we are satisfied that, despite an inadequate time estimate, the judge's reading adequately prepared him for the hearing. The inadequate time estimate did not, in the end, make any difference”, stated the high court’s judgment.
Newcastle United also believed the warrants were not justified because HMRC could have just asked the club or the directors, but the high court dismissed this as asking the individuals concerned could have resulted in ‘tipping off’.
‘Therein lies the tax loss’
HMRC has so far not been able to examine the records and documents seized as if the court had quashed the search warrants they would not be allowed to obtain and use the information.
The legal ruling provided details of the allegations for the first time, with HMRC investigating “a number” of alleged offences between 2010 and 2013.
Court papers stated that tax chiefs believe the transfers of Demba Ba, Moussa Sissoko, Sylvain Marveaux, Davide Santon and Papiss Cisse were all deals where Newcastle used “purported agents as intermediaries to conceal payments to players and their agents”.
HMRC claimed that the contractual arrangements for these transfers were a “sham”, and did not reflect what actually happened.
“The club’s agents passed on the vast majority of their fees to other agents acting for the players, or to associates of the players, or possibly to the players themselves,” stated HMRC’s introduction to the Newcastle application.
“Therein lies the tax loss. By using purported clubs’ agents as intermediaries to conceal payments, the players and club were able to evade income tax and national insurance.”
An HMRC spokesperson confirmed that its investigation into the suspected fraud will continue, while a Newcastle spokesman commented that the club was “disappointed” with the decision, and stated that the club was “considering all options, including whether to pursue an appeal.”
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