R v Harvey [2015] UKSC 73

Jack Harvey was convicted of handling stolen goods used in his plant hire company. The Supreme Court held that, although VAT accounted for to HMRC was technically 'obtained' under POCA, including it in a confiscation order would be disproportionate under A1P1, allowing his appeal.

Facts

The appellant, Jack Harvey, established JFL Harvey Ltd in 1972, a plant hire company in which he owned 98.9% of the shares. Following an arson attack he orchestrated on a competitor’s premises, police raided the Company’s premises in May 2009 and discovered that a significant proportion of the machinery had been stolen. He was convicted of nine counts of handling stolen goods and five counts of arson.

In confiscation proceedings under section 6 of the Proceeds of Crime Act 2002 (POCA), the appellant conceded he had a ‘criminal lifestyle’. The judge assessed the Company’s aggregate turnover for the relevant period at £5,159,880 (inclusive of VAT), found that 38% of stock was stolen, and assessed the benefit from general criminal conduct at £1,960,754.40 (with further benefit bringing the total to £2,275,454.40). The Company had accounted for VAT to HMRC throughout the relevant period, declaring £843,827 in output VAT, reclaiming £643,081.97 as input tax, and paying £200,745.03 to HMRC.

Issues

The single issue was whether, in assessing the benefit obtained by a company for the purposes of a confiscation order under POCA, any VAT accounted for and/or paid to HMRC should be subtracted from the turnover figure before the final calculation of benefit. The appellant argued this followed either from the proper construction of POCA or from Article 1 of the First Protocol to the ECHR (A1P1).

Arguments

Appellant

Counsel for the appellant contended that: (a) on a proper construction of POCA, the VAT element of receipts had never been ‘obtained’ by the defendant, since the trader merely collects VAT on behalf of HMRC; alternatively (b) including VAT in the confiscation figure would constitute disproportionate double recovery contrary to A1P1, as the State would recover the same sum twice — once through VAT and again through confiscation.

Respondent

The Crown argued that authority clearly established that a benefit is ‘obtained’ under POCA if received by the defendant, even if subsequently accounted for to a third party. No deduction is permitted for liabilities such as income tax, corporation tax, or other expenditure incurred in connection with the criminal activity. VAT should be treated no differently.

Judgment

The Supreme Court (Lord Neuberger, Lord Reed and Lord Mance in the majority; Lord Hughes and Lord Toulson dissenting) allowed the appeal.

Construction of POCA

The majority rejected the appellant’s first argument based on statutory construction. Lord Neuberger and Lord Reed held that, despite the powerful argument that VAT accounted for to HMRC was not truly ‘obtained’, it was important to hold fast to the established principle that, as stated in Waya, ‘[o]nce property has been obtained as a result of or in connection with crime, it remains the defendant’s benefit whether or not he retains it’. The interests of certainty in interpreting a complex statute required adherence to that orthodox position.

A1P1 and Proportionality

However, the majority accepted the alternative argument based on A1P1. Whilst VAT was technically ‘obtained’ under POCA, treating it as part of the benefit where it had been accounted for to HMRC would result in disproportionate double recovery by the State. The Court identified several reasons distinguishing VAT from other taxes: (i) VAT is transaction-specific and can be precisely attributed to particular property; (ii) under EU law the taxable person is regarded as collecting VAT on behalf of the tax authority, the tax being intended to be fiscally neutral; (iii) defendants may have paid input tax to suppliers; and (iv) HMRC’s practice in excise duty cases avoids double recovery.

Drawing on the reasoning in Ahmad, where the Court held that ‘it would not serve the legitimate aim of the legislation and would be disproportionate for the state to take the same proceeds twice over’, the majority concluded that the same principle applied to VAT accounted for to HMRC, whether by remittance or by being set off against input tax.

Practical guidance

The Court noted that the burden lies on the defendant to establish what sum should be deducted. Judges should adopt a robust, broad-brush approach where the evidence is confusing or incomplete. The position regarding VAT for which the defendant is liable but has not accounted was left open.

Dissenting judgments

Lord Hughes considered that VAT was not relevantly different from other taxes such as corporation tax, fuel duty or business rates, none of which are deductible from benefit. The trader is not a true agent of HMRC; the VAT element belongs to the trader on receipt and is not held on trust. There is no general principle in Waya against ‘double recovery’; rather, that case concerned restoration to a loser. He would have dismissed the appeal.

Lord Toulson similarly held that the income paid into the Company’s account was plainly ‘obtained’ as a result of or in connection with criminal conduct, and that the statutory scheme requires focus on gross receipts, not retained net benefit. He also doubted the practicality of the majority’s approach, particularly given dishonest defendants and the risk of disputed accountancy exercises.

Implications

The decision establishes that, in confiscation proceedings under POCA, where VAT has been accounted for to HMRC (either by payment or by set-off against input tax), it would be disproportionate under A1P1 to include that VAT in the calculation of benefit obtained. This is achieved not by reinterpreting the substantive provisions defining ‘benefit’, but by reading down the obligation to make an order in section 6(5)(b) of POCA so as to avoid disproportionality.

The decision is significant for criminal practitioners advising defendants whose offending occurred through VAT-registered businesses. It carves out a limited exception to the otherwise strict orthodoxy that gross receipts, not net profits, constitute the benefit for confiscation purposes. The exception does not extend to other taxes such as income tax or corporation tax, which remain non-deductible.

Important limits and unresolved questions remain. The Court expressly left open the treatment of VAT for which the defendant is liable but has not accounted to HMRC. The burden of proving that VAT was accounted for rests on the defendant, and judges are entitled to take a broad-brush approach where evidence is unreliable. The practical workability of the rule, particularly the assessment of input tax claims by dishonest defendants, was identified by the dissenters as a significant concern that Crown Court judges will need to address case by case.

More broadly, the judgment confirms the role of A1P1 as a substantive control on the operation of POCA, reinforcing that confiscation, although deterrent in purpose, must not result in disproportionate double recovery by the State.

Verdict: Appeal allowed. The Supreme Court held (Lord Hughes and Lord Toulson dissenting) that, although VAT accounted for to HMRC is technically ‘obtained’ for the purposes of POCA, it would be disproportionate under A1P1 to make a confiscation order calculated on a basis that includes VAT output tax which has been accounted for to HMRC (either by remittance or by set-off against input tax).

Source: R v Harvey [2015] UKSC 73