In this issue
Welcome
Failure to Prevent Economic Crime to Become An Offence (This Time)
The SFO's Current Direction and Priorities
Market Abuse Regulation: The Key Changes
Clean Hands: Legal Audits
Corporate Criminal Liability: a changing landscape
Terrorism Financing: Institutions be warned!
R v Harvey - An opportunity to challenge historic confiscation orders?
A New Global Forum for Asset Recovery
New Edition of Blackstone's Guide to POCA 2002 published
R v Harvey - An opportunity to challenge historic confiscation orders?
 
Richard Fisher QC
Richard Fisher QC

by

Richard Fisher QC



The Supreme Court ruled in the case of R v Harvey  [2015] UKSC 73 that when calculating the benefit figure the Court should ignore the total amount of VAT for which the offender had accounted to HMRC.  This may create a potential opportunity for challenging historic confiscation orders where defendants have been ordered to pay a sum greater than they should have.

Summary of case

The case concerned a defendant who had been convicted of handling stolen plant and machinery in the plant hire and contracting company he owned.  In assessing the value of the benefit he obtained from this crime under section 76(4) of the Proceeds of Crime Act 2002 (POCA), the judge arrived at a figure of 38% of the company’s total turnover. 

The defendant argued that the benefit figure should not have included VAT, for which the company had already accounted to HMRC.  The argument was that he had not "obtained" the VAT for the purposes of POCA, and recovery of it would amount to double recovery for the state and would be disproportionate, in breach of article 1 Protocol 1 of the European Convention on Human Rights, (“A1P1”, which protects the right to peaceful enjoyment of property).

Their Lordships, by a 3:2 split (Lords Toulson and Hughes dissenting on the effect of A1P1), allowed the appeal, essentially on two related grounds: (1) the ordinary construction of section 76(4) of POCA, and (2) the way that this ordinary construction feeds into the proper construction to be given to POCA in light of A1P1. 

The ordinary construction of section 76(4) of POCA

The Court held that section 76(4) was to be read as requiring only that the gross value of money or other property obtained as a result of or in connection with the relevant criminal conduct could be taken into account.  VAT liability arises on a taxable supply, and can be directly related to the obtaining of the property in question. In a case where the VAT on a transaction had been accounted for to HMRC, the UK Government would enjoy double recovery of the sum in question — once under POCA, and once under the ordinary VAT collection machinery set out in the Value Added Tax Act 1994. In addition VAT is intended to be neutral and it would be particularly harsh to allow a situation where a defendant has accounted to HMRC for all the VAT not to be given credit for that sum.

The effect of article 1 of Protocol 1

For the majority of their Lordships, it followed from the double recovery analysis that the argument favoured by the Crown may lead to a breach of A1P1, particularly given that POCA was supposed to deprive the offender, rather than act as a punishment.  Any provision entitling the executive to effect double recovery from an individual, although not absolutely forbidden by Protocol 1 art.1, was at risk of being found disproportionate.  The Court found that in this case, it was disproportionate, and that section 76(4) of POCA must therefore be read as excluding consideration of any VAT paid to HMRC.    

Opportunity for challenge

Their Lordships’ judgment in R v Harvey may offer defendants some limited scope for challenging historic confiscation orders which took VAT paid to HMRC into account when assessing and quantifying the benefit obtained.  The time limit for commencing an application seeking leave to appeal against a confiscation order is ordinarily within 28 days from the date the order was made. For older cases an application can be made out of time but to be fully considered this will require an extension of time which the Court of Appeal is unlikely to grant unless the grounds of appeal relied on are themselves meritorious. In a case where there has been a subsequent judicial development in the law the Court will only grant an extension of time if a substantial injustice would otherwise be done (R v R [2007] 1 Cr App R 10, CA).

Cases that are still within the 28 day time limit for appealing against a confiscation order may be able to rely on Harvey and commence an application to the Court of Appeal for leave to appeal applying the law as now decided.  Older cases, or cases where the Court of Appeal has refused permission to appeal, could face more of an uphill struggle.  In any event following R v Cottrell and Fletcher [2007] 1 WLR 3262, there must be some special or particular reasons beyond a mere change in the law for the appeal to succeed, i.e. there is a need to establish that a substantial injustice occurred.  The Court of Appeal are conscious of preventing a situation where they receive a flood of cases all relying on a change of the law. Similar considerations were applied by the Court of Appeal following the Supreme Court’s decision in R v Waya [2012] UKSC 51.  Following the decision in R v Waya applications were submitted in confiscation cases where offences relating to mortgage frauds had been committed. In R v Bestel, R v Raza and R v Bashir ([2014] 1 Cr App R (S) 53) the Court of Appeal confirmed and then applied the Cottrell and Fletcher approach.

Despite the challenges presented in older cases, it is anticipated that there will be cases where a change in the law really bites upon the defendant and where therefore it will be arguable that exceptional circumstances apply thereby satisfying the R v Cottrell and Fletcher approach. In such cases it will at least be arguable that without allowing an appeal a substantial injustice would be caused to that defendant. In the right case, a confiscation order made where the benefit figure included the VAT element, even though this VAT may have been properly accounted to HMRC, could cause substantial injustice because it may inflate the order by hundreds of thousands — or potentially even millions – of pounds.  In the context of A1P1 considerations the argument would be that substantial injustice is established because a confiscation order that is based upon an inflated benefit figure would lead to a level of interference with the subject’s rights which is unjustified and therefore disproportionate.

Defendants and their legal advisers should scrutinise confiscation orders made in their cases where VAT was an element in the calculation of the benefit figure. They may be able to apply the more measured and proportionate approach adopted in R v Harvey and if they can pass the R v Cottrell and Fletcher substantial injustice test, an appeal may lie. For those defendants facing confiscation proceedings in the future where VAT is relevant to the calculation of the benefit figure, the decision in R v Harvey should be considered and applied in conjunction with the recently amended terms of s.6 of POCA 2002 (amended by Serious Crime Act 2015 Sch.4 para.19 - 1 June 2015) which themselves reflect the more progressive recent approach to determining confiscation issues. The amended terms of s.6(5)(b) require the court to make a confiscation order requiring him to pay that amount, only if, or to the extent that, it would not be disproportionate to require the defendant to pay the recoverable amount.

 

Richard Fisher QC

 

 

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