Chahal & Anor v R

Neutral Citation Number: [2015] EWCA Crim 816 IN THE COURT OF APPEAL (CRIMINAL DIVISION) ON APPEAL FROM BIRMINGHAM CROWN COURT ( HH Judge Mayo) Cases No: CAO 2013 01001 B2 CAO 2013 05622 B2 Royal Courts of Justice Strand, London, WC2A 2LL Date: 21/05/2015 Before : LORD JUSTICE LAWS MR JUSTICE GILBART and HONORARY RECORDER OF STAFFORD (HH JUDGE TONKING) - - - - - - - - - - - - - - - - - - - - - Between : JASPAL SINGH CHAHAL and HARBANS SINGH - and - REGINA - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Appellants Respondent Rex Tedd QC for the Appellants A Mitchell QC and P Sharkey (instructed by the Crown Prosecution Service) for the Respondent Hearing dates : 17th April 2015 - - - - - - - - - - - - - - - - - - - - - Judgment MR JUSTICE GILBART : Subject matter of the appeals 1. 2. These two Appellants were among seven Defendants convicted of a conspiracy to cheat the public revenue through what is known as an MTIC fraud. Jaspal Singh Chahal was convicted after a trial before HH Judge Inman QC and a jury at Birmingham Crown Court on 24th June 2010, and sentenced on 6th July 2010 to 10 years imprisonment. On 31st March 2011 Harbans Singh was convicted after a trial before HH Judge Mayo and a jury at the same court, and sentenced on 6th April 2011 to a term of 4 years imprisonment. Confiscation proceedings under the Proceeds of Crime Act 2002 (“POCA 2002”) were heard before HH Judge Mayo in respect of the Appellants and two other convicted Defendants. On 29th November 2012, HH Judge Mayo gave a ruling on the legal principles applicable to the assessment of benefit. As a result of the ruling, the Crown and Appellants reached agreement on the relevant calculations, and Confiscation Orders were made under section 6 of POCA 2002 as follows: i) ii) in the case of Jaspal Singh Chahal, it was held that he had had a criminal lifestyle, and had benefited from his general criminal conduct to the extent of £ 15,556,921.19. The available amount was determined to be £ 438,280.69, which he was ordered to pay within 3 months, with a term of 3 years’ imprisonment to be served in default; in the case of Harbans Singh, it was held that he had had a criminal lifestyle, and had benefited from his general criminal conduct to the extent of £ 4,870,633.70. The available amount was determined to be £55,125.63, which he was ordered to pay within 6 months, with a term of 18 months’ imprisonment to be served in default. 3. Both Appellants appeal against the confiscation orders only, with leave of the single judge. VAT and Missing Trader frauds generally 4. 5. In the United Kingdom, VAT is chargeable on the supply by registered traders of relevant goods and services (“outputs”) - see sections 1 and 3 of the Value Added Tax Act 1994 (“VATA 1994”). A trader who has spent money on buying in goods in the course of his business is entitled to reclaim the VAT element as an “input.” When a VAT return is filed, it includes a box for the amounts due to HMRC, and the amounts of VAT on sums spent by the trader on chargeable goods or services (inputs). If the VAT charged on the outputs exceeds the inputs, the trader owes the HMRC the difference. If the VAT inputs exceed the VAT outputs, the trader is entitled to a credit or payment from HMRC – see sections 25-6 of VATA 1994. If goods are exported to the equivalent of a registered person in another EU state, they are zero rated, so that no VAT is chargeable or payable in respect of that export - see s 30(8) of VATA 1994. 6. 7. 8. To understand the nature of the fraud, it is necessary to start with what happens in a legitimate business context. If B, a trader in the UK who is registered for VAT, buys 100 mobile telephones from A, a registered trader in France, the effect of the VAT legislation is that B will have to account to HMRC for the amount that would be charged if the goods were sold within the UK, but he can also claim the amount as an input. So the net effect is neutral so far as chargeable goods or services are concerned. But when B sells the telephones to C, another registered UK trader, he must charge VAT (then at 17.5%), which he collects from C. He is then required to account for that to the Revenue in his VAT return, as VAT received in respect of an output. C may claim the VAT which he paid to B back from the HMRC because it was VAT he paid on an input into his business. If C then sells to D, another registered trader, C must charge VAT. In his return, he will account for the amount of VAT he has received from his purchaser D (and any others) and set off against it any VAT he paid to B. So, pausing there, in a legitimate context, the HMRC would have received the VAT charged by B without any effective deduction relating to the cost of acquisition from A. When B sells to C and C to D, the HMRC will get the VAT charged on the sales by B and by C, less the VAT claimed on the cost of the purchases by B and by C. Again in the real and legitimate world, B C and D will each be trying to make a profit, and each make more from the sale of the goods than they paid for them on acquisition. It follows that in the case of a successful business the overall picture would be that one would expect that the amount charged by a trader on sale will be higher than that paid on acquisition, and therefore that the amount of VAT charged on outputs will substantially exceed that paid on inputs. Were it otherwise, a legitimate trader would soon cease trading. There has also, if the business is legitimate, to be a limit on the number of times that the goods can be sold on at a profit. If each vendor achieves a profit on the onward sale of the goods, they will soon pass the point of a price which a customer is willing to pay. It must also be rare, if the trade is legitimate, for goods to be imported and then pass through a chain of purchasers only to be exported. It follows from the above that if the trader in B’s position does not account to the Revenue for the VAT charged, the Revenue will be deprived of that amount. If however C still claims it as an input, then the Revenue will not only not have received the VAT it was owed by B, but will be compensating C for the VAT he says he was charged by B: compensating either by means of a credit of the input tax paid against the output tax collected by C on his sales, or by a payment to C if it exceeds the output figure. This Missing Trader fraud 9. The fraud here worked as follows: C said that he had paid VAT to B in respect of the goods supplied to him, but B never accounted for any VAT, either on the acquisition from abroad or on the output of the sale to C. B was “missing” and could not be traced. C charged D. D then sold the goods to E, and so on. On each occasion the vendor would charge and collect VAT from the purchaser (and account for it to the Revenue), but claim as an input the sum paid to the previous vendor. The more transactions there were, the greater the distance between the “missing” trader and the later vendors or purchasers. Eventually, the goods would be said to wind up with another trader in the chain (say G) who would sell the goods abroad to an EU purchaser. Exports to a registered trader in the EU are zero rated, but the sale from F to G would attract VAT so G would recover that amount of VAT from HMRC as an input, and would not have to account for any VAT received on the sale abroad. Thus the fraud required three elements: a) b) c) the existence of a fictitious, or at any rate unidentified, importer; a series of intermediate traders (“buffers”) who would buy and sell the goods as they passed along the chain; a final UK purchaser who would not charge VAT on a sale of the goods into another EU state, but would claim from HMRC the amount he had paid in VAT to his predecessor. 10. 11. 12. Participation in the fraud as one of the intermediaries in the chain – a so called buffer company - or as the final exporter, was therefore done so as to facilitate the fraud. The evidence in this case showed that the buffer companies were claiming at least as much in inputs as they were in accounting for outputs. Thus, the design of the fraud was to see the eventual payment out to the final UK purchaser being of the same order as the amount originally claimed as an input by the company which had acquired the goods from the fictitious or unidentified importer. In that way the buffer companies would not be out of pocket, having passed on the goods, whose price and the VAT thereon would eventually be claimed. The indictment covered the period from January to November 2005. During that period, the Crown’s estimate of the total amount of MTIC trading by the various conspirators exceeded £ 181,500,000. The indictment covered the period 1 January 2005 to 11 November 2005. The appellant Jaspal Singh Chahal was a director and 50% shareholder of Letting Solutions (UK) Limited. Jagprit Randhawa was the other director and 50% shareholder. There were six companies (the ‘defendant companies’) which were run at least in part by the various accused at trial: Company Chahal & Sons Ltd The Anything and Everything Ltd ‘Chahal Talking Digital Ltd companies’ Letting Solutions Ltd H Communications SS & JS Director / Manager Chahal (and Babdeep Chahal) Ditto Ditto Randhawa and Jaspal Singh Chahal (Appellant) Harbans Singh (Appellant) Satnam Singh Sohal 13. The appellant Jaspal Singh Chahal (who is Babdeep Chahal’s brother) and Randhawa were the directors of Letting Solutions Ltd. They bought telephones from a variety of sources and sold to various companies including Chahal & Sons and Talking Digital. They also exported to various companies. In 2005 they claimed over £3.2 million in VAT repayments, of which over £2.3 million was paid. Their stated turnover in 2005 approached £72 million. 14. 15. It was the Crown’s case that although Letting Solutions might have been set up for a legitimate purpose (namely domestic property rentals) and might, very briefly, have traded legitimately, shortly afterwards it began to trade fraudulently. All of its trade, or a very substantial portion of it, was bogus. It was largely trading as a buffer company. A table was provided to the sentencing judge , which included details of the VAT returns made by Letting Solutions in 2005, as follows (we have omitted the amount of pence): Period ref Output Tax Outputs Input Tax Inputs Net Tax 162,378 1,422,457 262,002 1,505,916 -99,624 271,476 1,672,471 331,562 1,896,697 -60,086 213,931 1,354,453 232,294 1,331,937 -18,362 692,458 4,963,425 815,914 4,667,101 -123,455 652,855 1,351,461 1,262,933 2,262,156 5,267,015 10,738,08 10,663,14 17,161,81 912,637 5,219,326 -229,782 1,883,665 10,474,884 -482,204 1,784,434 10,225,612 -521,501 3,102,214 17,752,410 -840,058 495,599 7,981,691 1,358,443 7,800,878 -862,884 899,060 6,177,402 901,919 6,145,287 -2,858 849,968 4,352,838 71,754,79 844,915 4,830,408 5,049 9,114,275 4 12,429,999 71,850,456 -3,235,765 12,429,999 01/05 02/05 03/05 04/05 05/05 06/05 07/05 08/05 09/05 10/05 11/05 Summary Claimed inputs Net Payments claimed in Repayments by HMRC 16. It can be seen from the table that Letting Solutions was, if the accounting was genuine, making no or minimal profit. It will also be appreciated that there are elements of expenses in the running of the company (salaries, offices, stationery, etc. -3,237,956 2,375,072 Payment to HMRC/ Repayment by HMRC Repayment made Repayment made Repayment made Repayment made Repayment made Repayment made Repayment made Repayment made No repayment made No repayment made No payment made etc.) which will not show up in the above table, and render any apparent profit more nugatory, and any loss even greater. Further, it is striking that the amounts of sales every month are very much of the same order as the cost of purchases. 17. In the case of the Appellant Harbans Singh’s company HS Communications, no less than 82% of its sales were to Chahal and Sons. It too was a buffer company. The analysis of its trading for 2005 reveals the following (again whole ££ only) Period end Output Tax Outputs Input Tax Inputs Net Tax 03/05 5,994 14,611 10,680,17 2,450 14,073 3,543 Payment to HMRC/ Repayment by HMRC Payment to HMRC/ 06/05 1,832,104 1 1,861,828 10,640,833 -29,723 Repayment made No repayment made Payment to HMRC 09/05 2,731,469 2 2,475,588 14,146,833 -104,120 14,235,25 12/05 533,461 Totals Inputs claimed Net Payments claimed Payments made by HMRC 3,090,970 28,021,00 530,795 3,074,751 2,665 4870661 27,876,490 -127,635 4,870,661 133,843 29,723 18. The picture is therefore similar, of a company, which if trading legitimately, was doing so at no or minimal profit, where its output tax was very much of the same order as its claimed input tax. 19. We have referred to goods being passed along the chain. It is in fact quite unknown whether there were actual goods. But whether there were actual goods or not the operation was patently a sham fraudulent one. Its objective was not to buy and sell mobile telephones, let alone do so at a profit to any particular trader within it. It was to create a chain of traders ending in one who could gain a payment from HMRC as the exporter. It could only work if the first trader was missing. If he (B) had been real or identified, then the HMRC would have received from him the VAT he had charged C, so that any net gain to the conspirators at the time of the exporter’s claim would have been nil. 20. The fraud had two aspects where a loss was caused to HMRC which could not be made up elsewhere. Assuming that there were genuine goods, those occasions were: i) when B did not account to HMRC for the VAT charged on the sale to C, referred to by Judge Mayo as the “front end fraud”; 21. 22. 23. ii) when the exporter claimed credit for the cost of buying from its supplier, referred to by the Judge as the “back end fraud”. (Those phrases were derived by the Judge from Sangha [2008] EWCA Crim 2562 [2009] 2 Cr App R (S) 17, to which we shall refer below.) Had it been legitimate (and that itself requires the unlikely assumption that the passing of the same quantity of goods along a chain from importer to exporter with no buffer company actually selling the goods for more than it had paid for them) the HMRC would have received £y from the importer for the sale onwards by him, and paid out £y at the end to the exporter for the cost of his purchases. Under this fraudulent scheme, the HMRC never received the first sum of £y, but still had to pay out the second amount. But of course HMRC had had to pay out or credit sums along the chain in response to the submitted VAT returns. The transactions were in no sense genuine. They were conducted to obscure the links from the missing trader B to the final exporter G. It follows that the claims for input tax credits by the buffer traders were made as part of the design of the fraud. The participants in the fraud benefited directly from all the claims being made on HMRC, because it was only by making claims for, and receiving credits or payments, that the value of the goods could be passed down the chain so that the exporter could make a claim. But of course it is the Appellants’ case that the HMRC had been presented with claims for inputs, made as part of the fraud, far in excess of the net loss caused, and had paid out or credited sums in response. In our view it is an important matter that the fraud operated by the presentation of apparently genuine claims for inputs, but which were actually part and parcel of the fraud. While it is true that the fraud was so operated that the money received by a buffer trader was then used to engage in the next sham transaction, that was a decision for that trader. The fact is that the buffer companies had received or been credited with the claimed input. 24. We reiterate that is not clear that any goods were actually supplied. But the invoices and accounts produced by the Appellants and others in the fraud asserted that they were. If in fact there were no goods, then the scheme was even more of a sham. The judge found that the scheme involved a series of transactions being made within the same 24 hour period, and the purchasing company being in funds to pay for a purchase immediately upon receipt of a document evidencing the sale, neither of which are consistent with lawful trading, as the judge found. 25. The corporate veil has been lifted. These Appellants were controlling their respective companies. It is also to be noted that it was part of the fraudulent scheme that: i) ii) the fraudulent conspiracy in which the Appellants (and their co-conspirators) took part was not confined to the activities of one buffer company. Each claim for input VAT was made as one of a series of transactions along the chain relating to the particular goods (actual or fictitious) ; each series of transactions (including the related claims for input for VAT) relating to the particular goods was one of a number. 26. It follows that as parties to the fraud, each of the two Appellants was party to the making of fraudulent claims made by the other trading companies on the carousel so far as the series of transactions which passed through their companies were concerned. Statutory context: Proceeds of Crime Act 2002 Value Added Tax Act 1994 Article 1 of Protocol 1 of the European Convention on Human Rights 27. We start by referring to the following provisions of POCA 2002. “6 Making of order (1) The Crown Court must proceed under this section if the following conditions are satisfied. two (2) The first condition is that a defendant falls within any of the paragraphs— following (a) he is convicted of an offence or offences in proceedings before the Crown Court; (b) …………………………… (c) ……………………………. (3) The second condition is that— the prosecutor or the Director asks the court to proceed under (a) this section, or (b) the court believes it is appropriate for it to do so. (4) The court must proceed as follows— (a) it must decide whether the defendant has a criminal lifestyle; if it decides that he has a criminal lifestyle it must decide (b) whether he has benefited from his general criminal conduct; if it decides that he does not have a criminal lifestyle it must (c) decide whether he has benefited from his particular criminal conduct. If the court decides under subsection (4)(b) or (c) that the defendant has (5) benefited from the conduct referred to it must— (a) decide the recoverable amount, and (b) make an order (a confiscation order) requiring him to pay that amount. (6) ……………………………………………… (7) The court must decide any question arising under subsection (4) or on a balance of probabilities. (5) (8) ………………………………………………… (9) References in this Part to the offence (or offences) concerned are to offence (or offences) mentioned in subsection (2). the 10 Assumptions to be made in case of criminal lifestyle If the court decides under section 6 that the defendant has a criminal purpose of lifestyle it must make the following four assumptions for the (1) — (a) deciding whether he has benefited from his general criminal conduct, and (b) deciding his benefit from the conduct. (2) The first assumption is that any property transferred to the defendant at any time after the relevant day was obtained by him— (a) as a result of his general criminal conduct, and (b) at the earliest time he appears to have held it. (3) The second assumption is that any property held by the defendant at any time after the date of conviction was obtained by him— (a) as a result of his general criminal conduct, and (b) at the earliest time he appears to have held it. (4) The third assumption is that any expenditure incurred by the at any time after the relevant day was met from property obtained by him as a result of his general criminal conduct. defendant (5) The fourth assumption is that, for the purpose of valuing any obtained (or assumed to have been obtained) by the defendant, he obtained it free of any other interests in it. property (6) But the court must not make a required assumption in relation to particular property or expenditure if— (a) the assumption is shown to be incorrect, or there would be a serious risk of injustice if the assumption were (b) made. If the court does not make one or more of the required assumptions (7) must state its reasons. it (8)-(10)……. 76 Conduct and benefit (1) Criminal conduct is conduct which— (a) (b) constitutes an offence in England and Wales, or would constitute such an offence if it occurred in England and Wales. (2) General criminal conduct of the defendant is all his criminal and it is immaterial— conduct, (a) whether conduct occurred before or after the passing of this Act; (b) whether property constituting a benefit from conduct was obtained before or after the passing of this Act. Particular criminal conduct of the defendant is all his criminal (3) which falls within the following paragraphs— conduct (a) (b) conduct which constitutes the offence or offences concerned; conduct which constitutes offences of which he was convicted in the same proceedings as those in which he was convicted of the offence or offences concerned; (c) conduct which constitutes offences which the court will be taking into consideration in deciding his sentence for the offence or offences concerned. (4) A person benefits from conduct if he obtains property as a result of connection with the conduct. or in (5) If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage. (6) References to property or a pecuniary advantage obtained in connection with conduct include references to property or a pecuniary advantage obtained both in that connection and some other. If a person benefits from conduct his benefit is the value of the property (7) obtained. 84 Property: general provisions (1) Property is all property wherever situated and includes— (a) money; (b) all forms of real or personal property; (c) things in action and other intangible or incorporeal property. (2) The following rules apply in relation to property— (a) property is held by a person if he holds an interest in it; (b) property is obtained by a person if he obtains an interest in it; property is transferred by one person to another if the first one transfers or (c) grants an interest in it to the second; (d)-(h)………………………………………………. 28. We must refer also to Schedule 11 of VATA 1994 : “Recovery of VAT, etc. (1) VAT due from any person shall be recoverable as a debt due to the Crown. (2) Where an invoice shows a supply of goods or services as taking place with VAT chargeable on it, there shall be recoverable from the person who issued the invoice an amount equal to that which is shown on the invoice as VAT or, if VAT is not separately shown, to so much of the total amount shown as payable as is to be taken as representing VAT on the supply. (3) Sub-paragraph (2) above applies whether or not— (a) (b) the invoice is a VAT invoice issued in pursuance of paragraph 2(1) above; or the supply shown on the invoice actually takes or has taken place, or the amount shown as VAT, or any amount of VAT, is or was chargeable on the supply; or (c) the person issuing the invoice is a taxable person; and any sum recoverable from a person under the sub-paragraph shall, if it is in any case VAT be recoverable as such and shall otherwise be recoverable as a debt due to the Crown.” 29. Mr Tedd QC also places reliance on the effects of Article 1 of the First Protocol of the European Convention for the Protection of Human Rights and Freedoms, which is a “convention right” for the purposes of section 1 of the Human Rights Act 1998. It reads “Protection of property Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.” The confiscation proceedings and the issues before the Crown Court 30. It is common ground that this was a lifestyle case under section 6(4) of POCA 2002. The issues before the judge at the Crown Court were: i) which transactions should be included in the benefit figure ? In particular, should they include a) b) c) the total amount of purchases made by the conspirators through the buffer companies, or the total amounts of the inputs claimed from HMRC, or the figure paid out to the exporter in the chain ? ii) if either (a) or (b) applies, would it be disproportionate in the light of Article 1 of the First Protocol to make a calculation of benefit which exceeded the amount under (c) ? 31. When the confiscation proceedings first started, the prosecution contended that the benefit figure should include the whole turnover of the scheme. Thus in the case of Letting Solutions in 2005, it would include the total sum shown as the cost of purchases made by the company. However in the light of the decision of this court in Ahmad [2012] 2 All ER 1137, [2012] 2 Cr App R (S) 85 the prosecution accepted that it would argue for the aggregate amounts of input tax claimed by the conspirators. Originally the Crown asked for the total turnover of all the transactions (i.e. the gross figure - both of sales and the VAT charged on them) to be used, but then moderated its claim to the total inputs claimed. 32. Judge Mayo held that the proper approach was to include the total input claims in the benefit figure. He did so having received written and oral submissions, and produced what is, if we may say so with respect, a thorough and careful judgement, which we have found illuminating and helpful. Having reviewed the authorities, he set out his approach, as follows: i) ii) iii) iv) v) vi) vii) viii) ix) x) xi) each offender had been convicted of conspiracy to cheat the Revenue; the activity included both the “front end” and the “back end” frauds identified in Sangha. The companies involved were not exclusively exporters and had also acted as buffer companies within the chain; the corporate veil was torn away; the lifestyle provisions applied; the Court must therefore conclude that each defendant had benefited from general criminal conduct; section 6(5)(a) required the court to decide the recoverable amount. This is an amount equal to the defendants’ benefit from the conduct concerned; a person benefits from criminal conduct if he obtains property as a result of or in connection with the conduct. If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage; the question arises as to whether, on the facts presented to the jury, the defendant companies (and therefore the Defendants (including the Appellants) have obtained the payments in their bank accounts which represent monies received either as a result of sales to other traders in the carousel or which represent VAT charged or collected by other traders in the carousel and not accounted for to HMRC; the court had to apply the section 10 assumptions in determining what the recoverable amount was. These related to property transferred to, held by or incurred by a defendant any time after the “relevant day;” these assumptions could only be applied if they can be made without risk of injustice. There were protections in place at section 10(6)(a)-(b). It would only be in very unusual circumstances that a conclusion would be disproportionate if the checks and balance included in section 10(6) are properly applied; having decided the recoverable amount, the court had to take two further steps before making a confiscation order [under section 6(5)(b)] requiring the defendant to pay the recoverable amount; xii) xiii) the penultimate step was to apply paragraph 16 of Waya [2012] UKSC 51 [2013] 1 AC 294 and to make an order except and insofar as such an order would be disproportionate and thus a breach of Article 1 Protocol 1; the final step was to see whether section 7(2) of POCA 2002 applied – whether the defendant had shown that the available amount was less than the benefit. If yes, the confiscation order should be the available amount or a nominal amount. He then applied that approach to the instant cases. He concluded that a calculation of benefit based on total turnover would cause a serious risk of injustice under section 10(6)(b). He then referred to the Crown’s revised case before him that the amount of benefit was represented by the claims for VAT inputs on goods purportedly purchased. Having referred to the conclusions of the Court of Appeal in Sangha [2008] EWCA Crim 2562 [2009] 2 Cr App R (S) 17, he concluded that, when assessing benefit without the application of the assumptions in section 10, a fair and just conclusion to be drawn in such carousel frauds is that the buffer company’s benefit on each transaction is the fraudulently obtained pecuniary advantage of the deduction of input VAT on goods purportedly purchased. Schedule 11 of VATA 1994 identified the monies which “are recoverable as a debt due to the Crown.” The fact that these sums were recoverable means that, from the moment they were obtained, they were (in the context of this case) the proceeds of criminal conduct but even without such sums being identified as “recoverable” by dint of Schedule 11, they would, by the operation of a fraud, be the proceeds of criminal conduct. In the cases of the appellants and another defendant the evidence at trial showed the circulation of monies and, more critically, the actual claims for repayment of input tax for these companies. Section 10(6)(b) should not be applied. In the case of section 10(6)(a), he would have required some further evidence to disapply the assumption that this was later represented in monies received by the defendant companies as part of the fraud when the next cycle occurred. He said that it should be remembered that the repetition of these trading circles could often occur more than once per 24 hour period. Furthermore, there was no time lapse between (a) the moment when the document which gives rise to the pecuniary advantage of an input tax reclaim on purchase is issued and (b) the moment when the funds are received to allow the company to pay for that purchase. In honest trade, (b) occurs before (a); the funds would not be in place to purchase until after the sale of those goods had subsequently been achieved. Here the monies for purchase were always in the accounts of the buffer companies before they committed to buy, even though there was no contingent binding agreement to sell those particular goods on to whomsoever had provided the funds. These transactions were a sham to obtain both the “back end” and the “front end” benefits. He could not apply section 10(6)(b) so as to exclude the input tax reclaims within the funds circulating because these formed part of the “cost of committing the crime”, and referred to paragraph 26 of Waya. He adopted what he found to be the natural meaning and effect of the provisions. He bore in mind the purpose of the Act and put that into the context of the fraud which has been proved against these 4 offenders. It was audacious, persistent and sophisticated. This was reflected in the sentences passed and upheld on appeal. These 33. 34. 35. 36. were not offenders who had merely avoided paying VAT but had participated in activity aimed at destabilising the system whereby VAT is collected. In applying the provisions within POCA to these offenders, he reminded himself that he must only make an order which was proportionate and not in breach of any particular offender’s rights as set out in Article 1 Protocol 1. They must not be deprived of their possessions “except in the public interest and subject to the conditions provided for by law and by the general principles of international law.” Putting neither deterrence nor punishment into the scale, and conscious of the fact that one or all of these defendants may not have the means immediately or in the future to pay the amount sought, nevertheless, on the state of the evidence for and against these offenders as it currently stood he would not temper any confiscation order sought on the basis of input claims. Grounds of Appeal 37. The Appellants argued that i) ii) the loss to HMRC was the aggregate of the amounts claimed by the exporter, and that was the benefit for the purposes of sections 10 and 76; if that was wrong as a matter of interpretation of the provisions of POCA 2002, the application of Article 1 of Protocol 1 meant that the benefit should be limited to that sum. Discussion and Conclusions 38. There can be no doubt that the buffer and export traders’ receipt of a credit or payment in respect of the input claims, amounts to a pecuniary advantage within the terms of section 76(5) POCA 2002; see Dimsey and Allen [2000] 1 Cr App R (S) 497, where the identical provision in the Criminal Justice Act 1988 (as amended) was considered by my Lord, Laws LJ. Indeed, if one looks at the tables above, had the input claims not been made, then the relevant trader would have owed HMRC a very substantial sum indeed for output tax charged on its sales. 39. We also agree with the Judge that, strictly applied, the total turnover of the transactions (i.e. upon which VAT was calculated) represented benefit obtained. However we also agree with him that it was appropriate that the Crown limit its claim to the amounts of VAT which had been claimed. 40. So far as the VAT inputs are concerned we turn to the authorities. We make two important preliminary points; i) the court is not concerned under the POCA code to determine the amount of profit made, as calculated in an accounting exercise. The statutory code is aimed at determining the degree of benefit calculated in accordance with the statutory assumptions in section 10; see R v May [2008] UKHL 28, [2008] 1 AC 1028 at 1045C and Waya at [2012] UKSC 51, [2013] 1 AC 294 at paragraph 25 (set out at paragraph 56 below). There is in our view a sound public policy reason for that. Normal accounting practice relates to traders conducting lawful business, where transactions are not sham, nor designed to obscure criminality. It was a matter for a buffer trader in this case whether, having received a repayment or a credit for one, he took it and applied it lawfully, or instead put it towards the next sham transaction in the carousel fraud. It is no less a benefit received because he has not, in the event, seen the full fruits of it because he elected to use it in the next part of the fraud; ii) equally, the exercise is not concerned with limiting the benefit obtained by reference to the loss caused to another. The effect of the Code is not to limit the recovery of benefit generated by criminal conduct by reference to whether it is equivalent to the actual loss caused to another: see Dimsey and Allen per my Lord, Laws LJ, at page 501. “We also consider that there is force in the Crown's submission that a confiscation order falls to be clearly distinguished from a compensation order which may be made under section 35 of the Powers of Criminal Cases Act 1973. The amount of a confiscation order is referable to the applicant's benefit arising from the commission of his crime, not the loss suffered by the victim. As the Revenue's skeleton, paragraph 28, puts it: "The confiscation order is made to deprive the offender of the proceeds of his crime. A compensation order is made to compensate the victim of the crime." 41. 42. 43. The fact that an offender engaged in a fraud such as that under consideration here has incurred expenditure to enable him to commit his fraud does not entitle him to set off those expenses; see the judgment of the majority in Waya at para 26 (set out at paragraph 56 below). It may be important to note that the judgment in Waya was given over 8 months after those in this Court in Ahmad. The Appellants’ case is that the repayments received were used as part of the fraud, and that the only gain generated was at the end of the chain by the exporter. Put thus, we do not accept that. If the buffer company has not used the repayment to keep the fraud going, but has received it, it is on any view a benefit it has received. If It has used it to continue the fraud, then it is seeking to argue that a repayment of VAT it had fraudulently obtained should be discounted by the Court because it was used to finance the next fraudulent transaction. The Appellant draws attention to Ahmad [2012] EWCA Crim 391, where two Defendants were convicted of conspiracy to cheat the Revenue. A missing trader fraud was operated involving the purported import of computer parts to the UK from Ireland. The goods were then passed through two buffer companies to an exporter. The exporter claimed £12,662,822 from HMRC. That was used to fuel the fraud or laundered so as to be taken in cash or gold bullion. The first instance judge held that the benefit obtained was the total amount of the money that had passed through the bank accounts, a sum of £92,333,367 each. This was a procedure under the Criminal Justice Act 1998. The court concerned itself with the question with the phrase “a person benefits from an offence if he obtains property as a result of or in connection with its commission” (s 71(4) of the 1998 Act), which Hooper LJ considered to be similar to the phrase in s 76(4) of the 2002 Act. This passage appears at paragraphs 33-35 in the judgment of Hooper LJ “33 It would, in our view, be surprising if Parliament intended the costs of committing an offence to form part of the benefit of the offence. In Crown Prosecution Service v. Jennings [2008] 1 AC 1046, Lord Bingham giving the considered view of the Committee said: "13. ... It is, however, relevant to remember that the object of the legislation is to deprive the defendant of the product of his crime or its equivalent, not to operate by way of fine. The rationale of the confiscation regime is that the defendant is deprived of what he has gained or its equivalent. He cannot, and should not, be deprived of what he has never obtained or its equivalent, because that is a fine." (Emphasis added) 34 In R v Olubitan [2004] 2 Cr App R(S) 14, May LJ said, at page 78: "The section [section 71(1A) of the 1988 Act, the precursor to s 6 of POCA] is not to be construed so that a person may be held to have obtained property or derived a pecuniary advantage when a proper view of the evidence demonstrates that he has not in fact done so." This passage was cited with apparent approval by the House of Lords in May, at paragraph 19. 35 To make a confiscation order which includes within the benefit the costs of committing a crime seems to be contrary to the object of the legislation and that part of the confiscation order would, it seems to us, operate by way of a fine.” 44. However that must be read in the light of the subsequent definitive guidance by the Supreme Court in Waya at paragraph 26. Subject to whether there would be a serious risk of injustice (section 10(6)(b)) we cannot find anything in POCA 2002 which entitles one to discount the obtaining of property when it has been obtained fraudulently, and with a view to the commission of more fraud. After all, if it were obtained as part of the fraud, but was then used legitimately, it would be caught as part of the benefit. It is hard to see how the fact that it has been used to enable further fraud to be committed can exempt it from the scope of the calculated benefit. One may look at the passage in Olubitan cited by Hooper LJ at paragraph 34. But that concerned the issue of whether the person in question had in fact obtained property or obtained a pecuniary advantage. In the instant case there can be no realistic suggestion that he had not. It follows in our judgment that Ahmad does not require one to treat the payments claimed and credited or made in this case as not obtained by the Appellants. If it did, it can no longer be regarded as good law in the light of Waya. 45. We note also that in Harvey [2013] EWCA Crim 1104, [2014] 1 WLR 124, [2014] 1 Cr App R (S) 46 Jackson LJ, having referred to Ahmad, said this “We agree with the judge that ……… Ahmad should be distinguished .……… the circulating funds in Ahmad were not property obtained as a result of the criminal conduct. Nor were they sufficiently connected with the criminal conduct.” 46. It seems to us therefore that Ahmad cannot be cited as authority for the proposition that the expenses of running a fraud should be excluded in a case where they have themselves been generated by the fraud in question, or the criminal conduct in the relevant period in a lifestyle case. 47. The only argument raised before us against the taking of the full figure of the input credits and repayments is that it is said they did not produce an actual gain in the event for the Appellants as participants in the conspiracy. The fact that no gain accrues to the Appellant from the obtaining of a pecuniary advantage is irrelevant: see R v Smith (David) (HL) [2002] 1 WLR 54 at paragraph 27 per Lord Rodger of Earlsferry. 48. But in this case in any event, the claiming and receipt of those payments was integral to the fraud and part of it. They resulted in actual credits set against liabilities which actually existed (to account for the output tax received) or actual payments actually made into the Appellants’ companies’ accounts. The receipts of the credits or payments were also required to make the fraud work. As the court suggested in argument, they were part of the architecture of the fraud. That is also the express effect of section 10(4) of the 2002 Act: “(4) The third assumption is that any expenditure incurred by the defendant at any time after the relevant day was met from property obtained by him as a result of his general criminal conduct.” 49. One therefore turns to s 10, taken with s 76: i) ii) iii) the claim for inputs resulted in a credit being made or a repayment. If the amount exceeded the outputs, the registered trader would be entitled to payment of the difference. On any view the credit given was a pecuniary advantage; each successful claim for inputs on “buffer” transactions represented the obtaining of a pecuniary advantage, and/or the obtaining of property; in fact, if one applies the four section 10 assumptions and the terms of s 76 stricto sensu, the entirety of all the monies paid (principal and VAT) at each stage of the carousel is to be counted as part of the benefit. The Prosecution position is thus to have drawn back from that approach. 50. We think that gives a perfectly sensible result. One can ask - what was the benefit obtained when assessed in accordance with the statutory provisions? It is not what the loss was to HMRC, nor what the overall gain to the conspirators was once payments out have been set against payments in. It was the sums paid over to each buffer trader by HMRC as a repayment, or the amount credited, whereby the trader reduced his liability to pay over the output tax he had charged and collected. The receipt of VAT credits by the “buffers” was undoubtedly part of the benefit obtained. They were real credits which reduced real debts, or real repayments made into the bank accounts of the companies controlled by the Appellants. It follows that each repayment made or credited pursuant to a claimed input fell to be treated within section 76, and the assumptions in section 10 were properly applied. The approach adopted by the judge here, and which we endorse, is very much on all fours with that in Sangha [2009] 2 Cr App Rep (S) 17, [2008] EWCA Crim 2562 per Richards LJ at paragraphs 42-8. 51. Like this case, that was one where the judge had found that the trading was a sham, calculated to carry out the “back end” and “front end” frauds. Although there he concentrated on the use of VAT repayments to pay for the next purported purchase and then sale, the point of principle is that in a scheme of sham transactions, it is no 52. 53. 54. answer to the application of the relevant assumptions that the benefit is being received by another party to the fraud. The next issue is therefore whether the amount of benefit thus assessed should be moderated further by application of s 10(6) or by the effect of Article 1 Protocol 1. As to section 10(6)(b), we do not consider that any serious injustice is caused by treating the repayments and credits as part of the benefit. It was a matter for the offenders what they did with the fruits of their fraudulent VAT claims - fraudulent in the sense that they were made as part of an overall criminal enterprise to defraud the HMRC. The only reason why anyone could even argue that it would be unjust to treat the fraudulently obtained credit or payment is if one could say that the inherent design of the fraud devised by the conspirators was such that those benefits were passed onwards, and did not remain with the trader who had made the claim. In other words, it would be argued that it was unjust to include them because of the way a criminal and his associates have chosen to carry out their crime. The fact remains that the claims were real enough. The Appellants held them out to the Revenue as proper claims made in good faith. They were acted upon, and the Revenue was required to pay out for claimed payments of tax on inputs, or credit it against tax otherwise owed to them. In our judgment, it cannot be an injustice for the purposes of section 10(6)(b) for the court to apply the four section 10 assumptions to a fraudulently obtained pecuniary advantage. The simple fact is that the conspirators, including the two Appellants, received those credits or payments as part of a massive fraud. They were fraudulently claimed, and knowingly received as the product of fraud. It was up to them whether they passed them on to the next link in the carousel chain. The fact that they elected to do so cannot create a risk of injustice. 55. We turn now to Article 1 of Protocol 1 and the important discussion in Waya. Waya is not a lifestyle case. Mr Waya had raised money from a lender by giving false information in the application form about his employment record and his earnings. The Supreme Court held that he had the house was not the property obtained as the result of or in connection with Mr Waya’s fraud - see paragraphs 46-7 and 53, and the citation of Lord Bingham in May at paragraph 26. What he had obtained when he acquired it through the fraudulent application was only a chose in action. The mortgage loan obtained was one of £465,000 to be used to buy a property being acquired for £775,000 along with his own funds of £310,000. The value at the time of the confiscation hearing was £1,850,000. The judge assessed the benefit at £1.54 m, treating all of the value as benefit, less the amount he had paid himself. This Court reduced that to £1.1 million, arrived at by taking 60% of the value, because the original mortgage loan had contributed 60% of the original purchase price. It did not take account of the fact that Mr Waya had subsequently remortgaged it quite lawfully. 56. It is important to see how the majority of the Supreme Court approached the question of proportionality. This passage appears in the judgment of Lord Walker and Sir Anthony Hughes (with whom Lady Hale, Lord Judge, Lord Kerr, Lord Clarke and Lord Wilson agreed ) at paragraphs 20 -27: “20 The difficult question is when a confiscation order sought may be disproportionate. The clear rule as set out in the Strasbourg jurisprudence requires examination of the relationship between the aim of the legislation and the means employed to achieve it. The first governs the second, but the second must be proportionate to the first. Likewise, the clear limitation on the domestic court's power to read and give effect to the statute in a manner which keeps it Convention compliant is that the interpretation must recognise and respect the essential purpose, or "grain" of the statute. 21 Both Mr Perry and Lord Pannick submitted that it would be very unusual for orders sought under the statute to be disproportionate. Both drew attention to the severity of the regime and commended its deterrent effect. The purpose of the legislation is plainly, and has repeatedly been held to be, to impose upon convicted defendants a severe regime for removing from them their proceeds of crime. It is not to be doubted that this severe regime goes further than the schoolboy concept of confiscation, as Lord Bingham explained in R v May [2008] 1 AC 1028. Nor is it to be doubted that the severity of the regime will have a deterrent effect on at least some would-be criminals. It does not, however, follow that its deterrent qualities represent the essence (or the "grain") of the legislation. They are, no doubt, an incident of it, but they are not its essence. Its essence, and its frequently declared purpose, is to remove from criminals the pecuniary proceeds of their crime. Just one example of such declarations is afforded by the explanatory notes to the statute (para 4): "The purpose of confiscation proceedings is to recover the financial benefit that the offender has obtained from his criminal conduct." 22 A confiscation order must therefore bear a proportionate relationship to this purpose. Lord Bingham recognised this in his seminal speech in R v May, in adding to his "Endnote" or overview of the regime, at para 48, two balancing propositions: "The legislation … does not provide for confiscation in the sense understood by schoolchildren and others, but nor does it operate by way of fine." 23 Some general propositions may be offered in the light of the submissions of Mr Perry and Lord Pannick. 24 For the reasons given above, it must clearly be understood that the judge's responsibility to refuse to make a confiscation order which, because disproportionate, would result in an infringement of the Convention right under A1P1 is not the same as the re-creation by another route of the general discretion once available to judges but deliberately removed. An order which the judge would not have made as a matter of discretion does not thereby ipso facto become disproportionate. So to treat the jurisdiction would be to ignore the rule that the Parliamentary objective must, so long as proportionately applied, be respected. 25 A great many of the more serious cases in which confiscation orders are appropriate are criminal lifestyle cases. The statutory test for a lifestyle case is contained in section 75, read with Schedule 2, of POCA. In essence, a defendant who has in the past six years committed a number of offences from which he has benefited, or who has committed certain specified offences, will meet the statutory test. If he does, the calculation of his benefit will normally not depend on the known benefit obtained from identified offences, but will be made after applying the statutory assumptions set out in section 10 as to the criminal source of any assets passing through his hands in the six year period. Although the starting point is that the assumptions "must" be made (section 10(1)), this duty is subject to two qualifications contained in section 10(6). The assumptions should not be made if they are shown to be incorrect: section 10(6)(a). Nor should they be made if making them would give rise to a risk of serious injustice: section 10(6)(b). The combination of these provisions, and especially the latter, ought to mean that to the extent that a confiscation order in a lifestyle case is based on assumptions it ought not, except in very unusual circumstances, to court the danger of being disproportionate because those assumptions will only be applied if they can be made without risk of serious injustice. 26 It is apparent from the decision in May that a legitimate, and proportionate, confiscation order may have one or more of three effects: (a) it may require the defendant to pay the whole of a sum which he has obtained jointly with others; (b) similarly it may require several defendants each to pay a sum which has been obtained, successively, by each of them, as where one defendant pays another for criminal property; (c) it may require a defendant to pay the whole of a sum which he has obtained by crime without enabling him to set off expenses of the crime. These propositions are not difficult to understand. To embark upon an accounting exercise in which the defendant is entitled to set off the cost of committing his crime would be to treat his criminal enterprise as if it were a legitimate business and confiscation a form of business taxation. To treat (for example) a bribe paid to an official to look the other way, whether at home or abroad, as reducing the proceeds of crime would be offensive, as well as frequently impossible of accurate determination. To attempt to enquire into the financial dealings of criminals as between themselves would usually be equally impracticable and would lay the process of confiscation wide open to simple avoidance. Although these propositions involve the possibility of removing from the defendant by way of confiscation order a sum larger than may in fact represent his net proceeds of crime, they are consistent with the statute's objective and represent proportionate means of achieving it. Nor, with great respect to the minority judgment, does the application of A1P1 amount to creating a new governing concept of "real benefit". 27 Similarly, it can be accepted that the scheme of the Act, and of previous confiscation legislation, is to focus on the value of the defendant's obtained proceeds of crime, whether retained or not. It is an important part of the scheme that even if the proceeds have been spent, a confiscation order up to the value of the proceeds will follow against legitimately acquired assets to the extent that they are available for realisation.” 57. It is not hard to see why the majority of the Supreme Court regarded the order made against Mr Waya as disproportionate. He was being required to hand over the bulk of the value of his property, even though the party he had defrauded (the original building society) had suffered no loss, and had been paid in full when he remortgaged the house, and the bulk of the increase in value had its origin in the growth in property values and not in the original fraud. The Court pointed out that a mortgage loan does not increase in size as the value of the property increases. It is a fixed liability. The Supreme Court calculated Mr Waya’s then current equity after payment of the remortgage, calculated the appreciation in the equity from the date of purchase, and fixed the benefit as 60% of that figure, namely £392,400. 58. But that is not what is being dealt with here. This is a lifestyle case. As the majority in Waya pointed out at paragraph 25, it is only in a most unusual case that, if the assumptions in the legislation have been properly applied (and considered against section 10(6)), the result would be disproportionate in an Article 1 Protocol 1 sense. 59. We are entirely satisfied that the way in which the sentencing judge dealt with benefit did not have a disproportionate effect. These Defendants were making successful claims for large sums of money, holding out as legitimate business transactions those which were a sham and were actually part of the fraud. The truth is that the object of the carousel fraud was to supply and resupply goods several times over so as to mask the missing trader element. The raising of the outputs and their corresponding input claims was done so as to advance the fraud. Each buffer, including the companies controlled by the Appellants, held out as true a contention that it had incurred expenditure, including paying VAT (its input) to its supplier, to which it said it was entitled to reimbursement from HMRC. 60. 61. But now the Appellants seek to avoid the operation of the statute by asserting that the bogus nature of their claims is actually a reason for saying that the assumptions in s 10 should not apply. In our judgment, that cannot justify a conclusion that the benefits thereby calculated are to be seen as disproportionate. That would be equivalent to the cocaine dealer claiming that he should be allowed to deduct the cost of acquiring the cocaine, and that his benefit is not the sum he charged his customers, but the profit he made. It would offend against the clear guidance on the expenses of a fraud given in Waya at paragraphs 25-6. The fact is that while the claims for VAT were part of the fraud, and reflected purchases and sales made in the course of a fraudulent enterprise, they were still actual claims made to HMRC which resulted in actual credits or payments to the companies controlled by the Appellants. The fact is also that the HMRC has had claims made to it for inputs which were fraudulent by each buffer and by the exporter. While we accept that the eventual profit from the scheme was lower than the sum of the inputs claimed, that does not prevent each claim from being part of the benefit which has to be taken following the assumptions in the Act. The only reason why the Appellants claim that the benefit thus calculated would be disproportionate is that they contend that the design of the fraud was such that their profit from it would be lower. 62. In any event, there is a major difference of substance between the house in Waya and the benefit in issue here. 63. We do not consider that Article 1 Protocol 1 requires any different outcome. In Waya the calculation of the benefit had a critical effect on whether he would be deprived of much of the value of his house, and the Act had been applied so as to treat as recoverable benefit a growth in value that had no criminal provenance at all, and where that growth in value had continued after the original mortgagee had been paid in full. By contrast, these Appellants and the other buffer companies have engaged in repeated fraudulent claims for the purpose of perpetuating their fraud, and have received substantial sums paid into their bank accounts. 64. Article 1 Protocol 1 did not prevent Mr Waya from having some sum confiscated, but he had lawfully acquired the property. In his case his fraud did not cause any loss at all the mortgagee, and the mortgagee was in the event in no worse position than it would have been had the contents of the mortgage application been true. Here by contrast, the entire series of transactions was bogus, and repeated bogus claims have been made on the Revenue. In our judgment it is in the public interest that in this case, the degree of benefit should be assessed in accordance with POCA 2002 and requires no reduction on proportionality grounds. 65. We therefore agree with the approach of Judge Mayo. These appeals are dismissed.