A special commissioner allowed in part an appeal by a taxpayer against assessments raised in respect of moneys allegedly obtained by fraud for years in which the facts could not properly sustain the assessments raised and, on the balance of probabilities, there was no evidence that any deposits were obtained from the fraudulent activity.

Facts

On 6 December 2004 the Director of Assets Recovery Agency served a notice under s. 317(2) of the Proceeds of Crime Act 2002 (‘PCA 2002’) on the Board of Inland Revenue in respect of the Board's income tax and National Insurance functions in relation to the taxpayer for the tax he owed for the years in question, on grounds that the director had reasonable grounds to suspect that the income arising was chargeable to income tax and arose as a result of the taxpayer or another's criminal conduct (s. 317(1)(a)).

The belief that the taxpayer was involved in obtaining money by deception arose from information provided by the Norfolk police who had investigated the taxpayer following a complaint made in 1998 by an ‘investor’ who had invested money with him on which no return had been received. The investigation had traced eight other investors, all of whom provided written statements, who had lost money invested with Mr Forbes. It was established that at least £127,250 had been lost by investors over the period June 1995 until December 1996.

The taxpayer had been arrested on suspicion of obtaining money by deception and during interviews with the police he had admitted that some of the investors’ money had been paid to him by a financial intermediary and some had been paid to him directly. The investors had been led to believe that the money was to be invested with a US bank and many had initially received falsified interest certificates from the taxpayer. The money had in fact been paid into a Jersey bank account held in the name ‘Phorbes Group’. The taxpayer had claimed that he had not been behind the setting up of that group but that he had been allowed to draw cheques from the account. He further explained that he withdrew the investors’ money to meet his living expenses while he was waiting for the return of a considerable amount owed to him and which was held by a former business associate. That explanation had never been corroborated. Due to the death of one witness and the unreliability of another the Crown Prosecution Service made the decision that no further action should be taken. The case was referred to the Assets Recovery Agency in July 2004 which prompted the director to assume taxation functions in respect of the taxpayer. On examination of the evidence the director determined that the qualifying conditions set out in PCA 2002, s. 317(1)(a) were satisfied and that there were reasonable grounds to believe that the taxpayer had been engaged in fraudulent activities that had given rise to trading income assessable under Sch. D, Case I. The taxpayer appealed against nine assessments to tax and NIC for the years 1995–96 until 2003–04 inclusive raised by the director in pursuance of her powers under PCA 2002, s. 317(3). All the assessments specified the income as trading income taxable under Sch. D, Case I.

Issue

Whether the assessments were properly raised for the years in question.

Decision

The special commissioner (Stephen Oliver QC) (allowing the appeal in part) said that, on the evidence, the assessments in respect of the years 1995–96 and 1996–97 should be upheld. There was evidently a trading source, i.e. the systematic fraudulent activity of obtaining deposits. The full amount deposited by the investors was appropriated by the taxpayer to his own use.

However, for the years 1997–98, 1998–99 and 1999–2000, the facts could not properly form the basis of assessments. First, there was no evidence that any deposits were obtained after 1996–97 from the fraudulent activity. Then the police inquiry started in 1998. A reasonable inference from this was that the efforts of the police put a stop to any further criminal enterprise similar to the activities of 1995–96 and 1996–97. The trade ceased. Secondly, by the end of 1997 the taxpayer had extracted the known proceeds of crime. Whatever the subsequent assessed income was, it was unlikely to have been ‘trading income’ taxable under Sch. D, Case I. Thirdly, the taxpayer was on job seeker's allowances in 1998–99 and 1999–2000. If he were still carrying on a trade with such a high income as the director has ascribed to him, then he was committing a further criminal offence by claiming the allowance. It seemed improbable that he would have committed a benefits fraud of that nature while the police were in the course of investigating him.

In any event there was nothing to suggest that the director had made enquiries of the relevant benefits agency. It could only be assumed that the taxpayer was entitled to those benefits by reason of his unemployment and because he had no other source of income. On that basis, the fact that one government department was prepared to grant the taxpayer a social security benefit in 1998–99 and 1999–2000 was at least prima facie evidence that he was without income while claiming the benefits.

For the years 2000–01 and 2001–02, the assessments were not properly made. The information available to the Assets Recovery Agency did not justify them. There was no evidence whatsoever of any trade or trading income for those years. The evidence, such as it was, showed that the taxpayer was living on borrowed money throughout those years. He was still in receipt of job seeker's allowances and it was not alleged that he was defrauding the social security system. On the balance of probabilities, the amounts of £80,000 and £85,000 could not have been assessed as trading income, otherwise than on the basis of pure surmise.

Furthermore, the assessments for 2002–03 and 2003–04 could not be sustained on the evidence. In all the circumstances, the irresistible inference had to be that the fraudulent trade of obtaining money from investors had ceased some years before when the police inquiry was under way. The accountants’ explanation of how moneys came into the taxpayer's account as capital sums seemed to be more credible than regarding it as trading income from a trading source.

Accordingly, the appeals against the assessments for 1995–96 and 1996–97 would be dismissed and, in the absence of any evidence to the contrary, the assessments in the amounts of £75,000 and £60,000 respectively were confirmed. The consequential tax payable for 1995–96 was £24,289.80 and for 1996–97, £17,989.90. However the appeals against the assessments for all the other periods were allowed.

(2006) Sp C 566.
Decision released 18 October 2006