Article by Martin Edhouse, a senior technical editor, CCH Information. Published in the January 2002 issue of Tax Adviser. Current rules on confiscation orders and the developments concerning them – in the context of the Revenue’s new enthusiasm for prosecution of tax-related fraudulent behaviour – are reviewed in this article.
The Revenue have operated a long-standing policy of selective prosecution for tax-related offences; the vast majority of cases involving what amounts to fraudulent behaviour being dealt with through the process of an investigation settlement. Cases where an offending taxpayer is dealt with through criminal prosecution have hitherto been rare. However, there have been recent changes in both statutory rules and practice that seem to make the procedure of prosecution easier and more effective for the Revenue. The main reasons for these possible trends are:
FA 2000, s. 144
- Finance Act 2000, (FA 2000), s. 144 (the offence of fraudulent evasion of income tax); and
- the increasing use of confiscation orders under the Criminal Justice Act 1988, Part VI (i.e. ‘general purpose’ confiscation orders, as opposed to orders relating to drug trafficking etc.).
The usual charge for Revenue cases is the common law offence of ‘cheat’. Where deliberately incorrect accounts are submitted the charge may be the statutory offence of ‘false accounting’ under the Theft Act 1968. With the introduction of FA 2000, s. 144 (which applies to actions or omissions from 1 January 2001) the Revenue have clearly indicated a shift in their policy towards criminal proceedings. They aim to ‘enable serious but smaller cases to be prosecuted in greater numbers’ and see the new offence as one ‘which can be used for trials in magistrates’ courts’ (Inland Revenue Press Release 111/00, 27 June 2000). The same press release also indicated that ‘up to 50 extra staff will be allocated to this [prosecution] work’. Therefore it seems that there will be an increase in Revenue prosecutions using summary (i.e. magistrates’ court) proceedings. The new offence will make it easier to prosecute those involved, in for example, persistently failing to operate Pay as You Earn (PAYE) – or even persistently failing to submit tax returns. In this context it should be noted that anyone who is ‘knowingly concerned’ in the commission of the offence as someone who assists in some way with the matter maybe charged under s. 144. Thus an adviser who is ‘knowingly concerned’ in some way with a client's attempt to, say, defer the payment of PAYE obligations could conceivably end up being prosecuted if things go awry (e.g. the client subsequently becomes insolvent and the PAYE never gets paid).
The Revenue favours confiscation orders
In addition to dealing with an offender through a term of imprisonment and/or fine, a confiscation order can be made requiring a convicted person to pay a specified sum to the court. The Revenue now seem to view such orders as an essential adjunct to any successful prosecution. A review of the Revenue’s Prosecution Press Releases (see the Revenue’s website at www.hmrc.gov.uk/news/press.htm) shows that in almost all recent cases a confiscation order has been sought. In a recent Prosecution Release (CC12/01) the full potential of a confiscation order was demonstrated. John Foggon; of Swinton, Manchester – who was jailed for two years in May 2001 after pleading guilty to diverting over £1m of his company’s money into an undisclosed bank account that he controlled – was subjected to an order requiring the full amount (£1,068,441) of the diverted funds to be confiscated. Such an order is unusual in that the courts have, until now, only made orders for the amount of the tax lost. This case seems to mark a new approach by Revenue prosecutors in applying for confiscation orders.
Conditions for a confiscation order
Once an individual has been convicted, the Crown Court or magistrates’ court may consider, on its own initiative, or must consider, if requested to do so by the prosecutor, the issue of a confiscation order against the offender (Criminal Justice Act 1988, (CJA 1988), s. 71(1)). If the court is then satisfied that the offender has benefited from criminal conduct it must proceed to assess the amount to be recovered. The criminal conduct that the court has to consider obviously includes the offences that the offender has been convicted of and also extends to any offences that the court would be taking into consideration in determining the offender’s sentence. The standard of proof required by the court in any of its deliberations regarding confiscation orders is that which is applicable for civil proceedings (i.e. on the balance of probability). A finding that an offender has obtained any form of property or pecuniary advantage as a result of, or in connection with, committing an offence is sufficient to establish that the person has ‘benefited’ from criminal conduct. The measure of the benefit is the value of any property or pecuniary advantage that has been obtained.
For these purposes, ‘property’ includes money, and tangible and intangible assets of any description, wherever situated. The value of property (other than cash) is its market value and where property is held subject to an incumbrance (e.g. a mortgage) the amount required to discharge the incumbrance is to be deducted from the market value (CJA 1988, s. 74).
The sentence for the offence and the confiscation order
The making of a confiscation order is intended to be independent of any sentence passed down by a court; the order must not influence the sentence (CJA 1988, s. 72). The only exception to this rule is where some financial penalty will form part of the sentencing process i.e.:
Limits to the order’s amount
- the imposition of a fine;
- the making of a compensation order against the offender; and
- the making of forfeiture or deprivation orders against the offender.
The amount of any confiscation order is mandated by the legislation to be an amount equal to:
- the benefit obtained from the criminal conduct; or
- the total amount that might be realised from the offender's assets;
whichever is less (CJA 1988, s. 71(6)). There is an exception to this rule which will could well apply in tax related cases. The mandatory amount will not apply if the ‘victim’ of the relevant criminal conduct institutes civil proceedings for the recovery of any losses suffered. The Revenue (and Customs and Excise) are regarded as the victims for these purposes. If they attempt to recover assessed tax lost, interest and/or penalties using civil recovery procedures, as well as prosecuting the offender, the regime of the confiscation order is adapted. In such cases the court is given discretion (rather than being obligated) regarding the making of a confiscation order, which may be less than the mandatory amount derived as above, but which cannot exceed it (CJA 1988, s. 71(1C)).
Once a court is engaged in the process of making a confiscation order it may require the prosecutor to provide, within a specified timescale, a statement setting out matters relevant to determining whether and to what extent the offender has benefited from criminal conduct (CJA 1988, s. 73). Supplementary statements maybe required by the court if it is considered necessary. Copies of all statements must be provided to the defendant. Where the defendant accepts the accuracy of all or part of any statement(s) the court may treat such facts as conclusive. The court may also require the defendant to produce, within a specified period, any information that it considers necessary (CJA 1988, s. 73A). Copies of any such information must be provided to the prosecutor, and as with the prosecutor’s statement, any agreed facts can be treated by the court as conclusive. If the defendant fails to provide the information required within the time limit, the court is free to draw any inference from the failure as it considers appropriate; unless the defendant has a ‘reasonable excuse’ for the failure (CJA 1988, s. 73A(5)). Clearly, it is likely to be in the defendant’s best interests to co-operate with the court in this matter, since it is highly likely that adverse inferences will be drawn from any failure to comply with an information order. Where an appeal is lodged against the original conviction(s) which form the basis of the confiscation order, or where a case is complex, it is open to the court to postpone the making of a confiscation order. In the case of an appeal a postponement should not extend beyond three months from the determination of the appeal; in any other case a postponement should not extend beyond six months from the date of conviction. These limits to postponement may be waived if the court is satisfied that there are ‘exceptional circumstances’ (CJA 1988, s. 72A).
Assumptions regarding the offender
The legislation seems to anticipate that establishing the degree to which an offender has ‘benefited’ from criminal conduct will be difficult and so in addition to the information-seeking powers mentioned above the court is empowered, in certain circumstances, to make assumptions about the offender’s finances. The conditions are that:
- the prosecutor initiates the making of a confiscation order;
- a certificate of the prosecutor’s opinion that the assumptions should be made is given; and
- the offender is convicted of at least two offences.
The assumptions are that:
- all of the property held by the offender at the date of conviction, or acquired during the six years preceding conviction was obtained as a result of committing the offences concerned;
- all benefits received by the offender were received free of any incumbrance; and
- all expenditure during the six years preceding conviction was met out of payments received as a result of committing the offences concerned.
Where any of the assumptions relating to any property or expenditure, above, are plainly incorrect or would result in a serious risk of injustice the court may ignore it. Thus if it is clear that some of an offender’s property was acquired, say, by inheritance, it would not be added into the valuation of the benefit obtained. Likewise, expenditure that is identifiable as being met out of recorded, legal receipts (e.g. drawings, shown in accounts) would not be added in to the valuation (CJA 1988, s. 72AA).
Collecting the amount due
Once a confiscation order is made interest will begin to run on the amount due (at the rate applicable to civil judgment debts) if it is not paid by the date specified in the order. The interest is added to the basic amount due under the order for collection purposes. As a further incentive to pay the amount due under a confiscation order an offender will be subject to an additional term of imprisonment based on the assumption that the amount due under the order is (and any added interest) a fine imposed by the court. The sentence for the, effective, non-payment of the deemed fine does not begin until any custodial sentence for the original offence has ended (i.e. a consecutive sentence, not concurrent). What is more the original confiscation order can remain in force throughout, since it is not expunged by serving any sentence for non-payment! In the case of Mr. Foggon, mentioned above, non-payment of the confiscation order could result in a further six years’ imprisonment.
Where the prosecutor considers that an offender’s realisable property may be at risk a restraint order may be sought (by ex parte application). Such an order will prohibit any person from dealing with any of the property covered by the order. The prosecutor may also apply (again ex parte) for a charging order to be made which secures any receipts of funds for the Crown. The assets, which can be subject to such a charge are: land, government stocks, company shares and units in unit trusts. It is always open to any person affected by restraint and charging orders to apply to the court for their discharge or variation (CJA 1988, s 76-79).
The prosecutor may also apply to the High Court for a receiver to be appointed over any realisable property subject to a confiscation order. The High Court may instruct the receiver as to how the property is to be dealt with. The receiver is entitled to recover any expenses out of the realised proceeds.
The future of confiscation orders
The procedures outlined above will be amended if the Proceeds of Crime Bill 2001 (currently at the committee stage in the House of Commons) is enacted without substantial amendments. The Bill will establish an ‘Assets Recovery Agency’ and will revise many of the procedures for recovering amounts due under confiscation orders. The basic rules relating to the level of proof required for an order, the calculation of the benefit received, the assumptions that can be made in certain circumstances, charging orders, restraint orders and the appointment of receivers are largely unaffected.
However the creation of a new Agency; which is intended to have ‘lead responsibility for asset recovery’ and to contain ‘a centre of excellence for financial investigation training’ (Explanatory Notes to the Proceeds of Crime Bill 2001); clearly indicates that the government and Revenue authorities fully intend to develop this aspect of the criminal justice system.
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January 2002 by