Treatment of VAT in Confiscation Proceedings - Peter Doyle QC

The awaited judgment of the Supreme Court in R v Harvey[1] was handed down on the 16 December 2015. In a majority judgment the court held that where Value Added Tax had been accounted for and/or paid to HMRC then that amount must be deducted from the turnover figure prior to any calculation of “benefit”.
Harvey was the majority shareholder in and operated a company registered for VAT. It was engaged in hiring plant and machinery. Some of the equipment used had been stolen and he was convicted of a number of counts of handling stolen goods.
In calculating his “benefit” from his offending both the Crown Court and the Court of Appeal had ruled that the company’s turnover must include the amount of output VAT on the company transactions even though that tax had been accounted for and paid to HMRC.
This approach was based on the established principle that confiscation involved the identification of what was obtained irrespective of what was retained after expenditure; even where that expenditure was in the form of income or corporation tax. POCA is concerned with gross receipts. A defendant cannot argue that a sum of money or the value of an asset acquired as a result of criminal activity should be reduced by other liabilities.
The appellant contended that it was wrong to include VAT output tax in the company turnover because (i) that result followed from the wording of POCA 2002 applying normal domestic principles or alternatively (ii) it was the result of the application of Article 1 of the First Protocol (“A1FP”) introduced by the Human Rights Act 1998 which states that every person should be “entitled to the peaceful enjoyment of his possessions” and that nobody should be “deprived of his possessions except in the public interest and subject to the conditions provided for by law…”.
The second paragraph of the Protocol derogates from the first to the extent that it states that it should not “in any way impair the right of the state to enforce such laws as it deems necessary to control the use of property” for two identified purposes, namely, “in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
The basic principle of the Vat system is that it is intended to tax only the final consumer. The sole requirement imposed on the taxable persons when they take part in the production and distribution process prior to the stage of final taxation, regardless of the number of transactions involved, is that at each stage of the process they collect the tax on behalf of the tax authorities and account for it to them.
It is not the taxable persons who themselves bear the burden of VAT. The tax is therefore intended to be neutral in its impact on taxable persons who merely collect the tax on behalf of HMRC.
The majority of the court recognised that in a number of respects VAT, for which a defendant had to account and had accounted to HMRC, was in a different category from either income or corporation tax and a fortiori from expenses incurred in connection with acquiring money or an asset.
The court recognised that it would seem particularly harsh, even penal, in a case where a defendant had accounted for all the VAT for which he is liable, not to allow him credit for that sum. Even where no input tax had been paid in the course of running a business dishonestly it would be hard to justify treating the company in the same way regardless of whether it had paid the input tax or not.
The court also took note that it was not the practice of HMRC to seek double recovery of excise duty due in respect of smuggled goods and a confiscation order in the same sum. Instead their practice is to only seek a confiscation order and do not the recovery of the duty; thus no breach of A1FP arises.
Although the court rejected the first of the appellant’s arguments in the interests of minimising the risk of uncertainty as to the meaning of POCA, that did not justify rejecting the alternative way the appellant’s case was advanced based on A1FP.
Any provision which entitles the Executive to effect double recovery from an individual, while not absolutely forbidden by A1FP, was clearly at risk of being disproportionate.
In Waya[2] it was made clear that 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 a defendant as it would amount to a “financial penalty” or “an additional punitive sanction” which should not be imposed through the medium of POCA.
Given the fact that VAT is effectively collected by a taxpayer as described above the two situations were recognised by the court to be quite similar. The policy behind the principle discussed in Waya is in part that a defendant who makes good a liability to pay or restore should not be worse off than one who does not.
The court therefore held that although it would be appropriate under the terms of POCA as traditionally interpreted, it would be disproportionate, at least when VAT output tax had been accounted for to HMRC, either by remittance or by its being set off against input tax, to make a confiscation order calculated on the basis that the tax or its equivalent had been “obtained” by the defendant for the purposes of POCA.
The court left open the position in relation to VAT for which the defendant was liable but in respect of which he had not accounted to HMRC.
In short the dissenting judgments held that the input tax was money received by the defendant and owned by him. It was not the case that he was a temporary custodian of the sum for the state. The fact that he had a legal obligation to account for the equivalent sum to HMRC each quarter did not alter the fact that he had “obtained” the tax, owned it and was at liberty to spend it as he thought fit. This approach was neither consistent with the legislation nor disproportionate.
Peter Doyle QC
18 December 2015

[1] (2015) UKSC 73 on appeal from (2013) EWCA Crim 1104

[2]  (2012) UKSC 51