The Court of Appeal dismissed an appeal by a trader against a confiscation order made following his conviction for fraudulent evasion of VAT where the transactions to which he had been party constituted supplies of goods and economic activities within art. 4(1) of the sixth directive which were subject to VAT. Accordingly he had been rightly convicted and there was a proper basis for the confiscation proceedings.

Facts

The appellant was convicted of being knowingly concerned in the fraudulent evasion of VAT, contrary to VATA 1994, s. 72(1), on the basis of his involvement in a carousel/missing trader fraud involving the sale and purchase of computers and computer parts between companies in different EU member states. He was sentenced to five years’ imprisonment and was disqualified from being a company director for a period of 19 years. He sought leave to appeal against both conviction and sentence and to add a new ground of appeal. The basis of the new ground was that the appellant's conviction was unsafe because, at the time of his trial, Customs had begun to implement a policy to deal with carousel/missing trader fraud which involved the contention that such frauds should not be subject to VAT. The argument was that VAT was only exigible where there was economic activity; and, since carousel frauds amounted to a non-economic activity, they were not subject to VAT The appellant contended that that ran counter to decisions taken over many years to prosecute carousel/missing trader fraud as s. 72(1) offences

The Court of Appeal refused leave to appeal against conviction on the original grounds. The prosecution conceded, in the light of decisions of the VAT Tribunal in the cases of Bond House Systems Ltd v C & E Commrs [2003] BVC 2,319 and Optigen Ltd v C & E Commrs [2003] BVC 2,518, that counts alleging a breach of s. 72 should not have been charged; and submitted that policy decisions had been taken in a number of cases to amend indictments so as substitute charges of cheating the revenue, fraudulent trading and conspiracy to defraud. The court refused the appellant's application to amend the grounds of appeal. It held that if Customs’ policy had been known by the prosecution it could have successfully applied to amend the indictment by adding a count alleging cheating the revenue and possibly counts of fraudulent trading. Such charges would not have altered the nature of the case against the appellant nor the nature of his defence. In those circumstances, there would be no injustice in refusing leave to appeal out of time and in leaving the conviction to stand.

Following that hearing the prosecution pursued confiscation proceedings against the appellant under s. 71 of the Criminal Justice Act 1988. The appellant argued that the court either could not or should not proceed with the confiscation proceedings. He submitted that he could not have benefited from the offence of which he was convicted, once it was conceded that he did not in fact commit any offence. The judge rejected those submissions, holding that the conviction for the offence contrary to s. 72 had been left undisturbed by the Court of Appeal; if the Court of Appeal had proceeded by way of substitution then the appellant would have been convicted of cheating the public revenue; and such a substituted conviction would give rise to a benefit, namely the receipt of payment of false claims for the recovery of VAT from Customs. Accordingly, the judge imposed a confiscation order in the sum of £177,453.33, to be paid within 18 months, with two years and three months’ imprisonment in default, to be served consecutively to the term of five years’ imprisonment. The appellant appealed.

Issue

Whether the judge erred in finding that the appellant had benefited from ‘relevant criminal conduct’ within the meaning of s. 71(1A) of the Criminal Justice Act 1988; and whether it was open to the judge to conclude that the appellant had benefited from ‘relevant criminal conduct’ once the Crown conceded that the appellant did not commit the offence contrary to VATA 1994, s. 72.

Decision

The Court of Appeal (Hooper LJ, Simon and Lloyd Jones JJ) (dismissing the appeal) said that in the Bond House, Optigen and Fulcrum Electronics Ltd cases ([2006] BTC 5,050), the ECJ interpreted the first and sixth directives in a way which was contrary to Customs’ interpretation. In the light of that development the prosecution submitted that its concession that s. 72 was not an appropriate charge for the criminal activity which had been alleged against the appellant was wrongly made.

The prosecution now submitted that in the light of the ECJ's ruling in the Optigen, Fulcrum and Bond House cases and its decision in Halifax plc v C & E Commrs (Case C-255/02) [2006] BTC 5,308 the charge under s. 72(l) of which the appellant was convicted by the jury was good in law and therefore provided a proper basis for the subsequent confiscation proceedings. The decision in the present case depended on the proper construction of the sixth directive. Under art. 2(1) of the sixth directive, a supply of goods or services effected for consideration by a taxable person acting as such was subject to VAT. Under art. 4(1) ‘taxable person’ meant any person who independently carried out any economic activity specified in art. 4(2). The term ‘economic activities’ was defined as comprising all activities of producers, traders and persons supplying services, including the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis. Under art. 5(1) ‘supply of goods’ meant the transfer of the right to dispose of tangible property as owner. The scope of the incidence of VAT was very wide and the words ‘economic activities’ for the purposes of art. 4 were broadly defined, to be viewed objectively and applied without regard to the purpose or results of the transactions concerned. The subjective intention of the party carrying out the transaction (or in the chain of transactions) was in most cases irrelevant. Each transaction fell to be considered on its own merits. Some transactions fell outside the scope of VAT; but those were transactions in relation to products or services which by their nature could not be marketed, e.g. drugs and counterfeit currency. In such cases competition between a lawful and unlawful economic sector was precluded. The fact that the transaction was unlawful or constituted an offence did not prevent it being subject to VAT. So long as the trade itself was lawful, there was economic activity irrespective of whether any particular trader was acting fraudulently or otherwise. The fact that Customs would be entitled to withhold a repayment where fraud could be proved against the taxable person did not mean that the fraudulent economic activity was not subject to the VAT regime. Accordingly, if the trade itself was lawful, there was economic activity irrespective of whether any particular trader was acting fraudulently or not.

In the present case, there were invoices and delivery notes which were evidence of the sale and of the transfer of title in goods (computers and computer parts) which were traded legitimately. Furthermore money transfers were made as part of those sale and purchase transactions. Viewed objectively the transactions to which the appellant and his company were parties constituted supplies of goods by a taxable person acting as such and economic activities within the meaning of sixth directive, and were therefore subject to VAT.

It followed that the appellant was rightly convicted of the offence of being knowingly concerned in the fraudulent evasion of VAT, contrary to VATA 1994, s. 72(l); and that the concession made by the prosecution on the conviction appeal was wrongly made. Whilst a prosecutor should not be allowed to go behind the factual case argued in the Crown Court to advance a different case for the purposes of confiscation issues, in the present case, the Crown was not changing the nature of the factual case. It was reverting to the original charge as a matter of proper legal analysis and with a view to upholding the original basis of conviction (Halifax plc v C & E Commrs (Case C-255/02) [2006] BTC 5,308 and Optigen Ltd, Fulcrum Electronics Ltd and Bond House Systems Ltd v C & Commrs (Joined Cases C-354/03, C-355/03 and C-484/03) [2006] BTC 5,050 considered).

Court of Appeal (Criminal Division).
Judgment delivered 7 November 2006.