Foggon, R v

The appellant, John Foggon, is now 57 years old. Since 1985 he has run a successful company, first named Vaclensa Limited, which then became Vaclensa PLC. He is chairman and until March 1999 owned 55% of the shares, the balance being held within his family. The company supplied cleaning machines and had service contracts with commercial customers including breweries and hotels. In the year to 31 March 1999 its turnover was more than £4 million. The company banked with Lloyds.

Between 1 June 1990 and 31 October 1998 the appellant arranged for substantial sums of money received from Vaclensa’s customers totalling £1,007,034 to be paid into a bank account in the company’s name with the Trustee Savings Bank. The existence of this account was not disclosed to Vaclensa’s auditors. The monies which went into it were not declared for tax. The appellant used the monies largely for his own private purposes.

On 23 March 2001 the appellant pleaded guilty to an offence of cheating the public revenue. On 11 May 2001 he was sentenced to 2 years imprisonment. Confiscation proceedings were postponed and were heard before His Honour Judge Humphries on 30 August 2001. A confiscation order was then made by the judge in the sum of £1,068,441 with 6 years imprisonment in default, to be consecutive to the sentence of 2 years. The sum has been paid.

The appellant appeals against the making of the confiscation order with the leave of the single judge to argue three grounds of appeal. Those are :

that the applicable statutory provisions were those of the Criminal Justice Act 1988 prior to amendment by the Proceeds of Crime Act 1995, whereas the judge held that the amended provisions applied;

that the judge was wrong to hold that the amount of benefit was the amount of money paid into the TSB account less certain deductions, but should have held that it was the amount of tax not paid;

that in any event there should have been a credit against that benefit in the sum of £125,000 which was paid on account of VAT after the appellant faced proceedings.

The judge proceeded on the basis that the case was governed by the Criminal Justice Act 1988 as amended by the Proceeds of Crime Act 1995. The prosecution now accept on the basis of R v Ahmed, Court of Appeal, unreported, 8 February 2000 and R v Brown [2001] EWCA Crim 2761, Court of Appeal, unreported, 7 December 2001, that this was wrong. Those cases were not cited to the judge. As the offence commenced before the commencement date for the amendments, the 1988 Act should have been applied as unamended by the 1995 Act. The relevant difference is that under the 1988 Act as unamended the judge had a discretion whether to make a confiscation order and as to its amount. Under the Act as amended he would have had a duty. The judge held that, if he was wrong and his power was discretionary, he would nonetheless make an order in the circumstances. That was plainly right and has not been challenged before us. So, subject to the possible resurrection of discretion in connection with VAT (to which we will come), this ground has gone.

Sections 71 (1) to (7) of the 1998 Act prior to amendment provided :

“71 (1) The Crown Court … shall … have power, in addition to dealing with an offender in any other way, to make an order under this section requiring him to pay such sum as the court thinks fit.

(2)

The Crown Court may make an order against an offender where –

(a)

he is found guilty of any offence to which this Part of this Act applies; and

(b)

it is satisfied –

(i)

that he has benefited from that offence or from that offence taken together with some other offence of which he is convicted in the same proceedings, or which the court takes into consideration in determining his sentence, and which is not a drug trafficking offence; and

(ii)

that his benefit is at least the minimum amount.

(4)

For the purposes of this Part of this Act a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained.

(5)

Where a person derives a pecuniary advantage as a result of or in connection with the commission of an offence he is treated for the purposes of this Part of this Act as if he had obtained as a result of or in connection with the commission of the offence a sum of money equal to the value of the pecuniary advantage.

(6)

The sum which an order made by a court under this section requires an offender to pay must be at least the minimum amount, but must not exceed –

(a)

the benefit in respect of which it is made; or

(b)

the amount appearing to the court to be the amount that might be realised at the time the order is made,

which ever is the less.

(7)

For the purposes of this Part of this Act the minimum amount is £10,000 or such other amount as the Secretary of State may specify by order made by Statutory Instrument.”

By section 102 (1), “property” includes money. Section 102 (5) provides :

“References in this part of this Part of this Act to property obtained, or to a pecuniary advantage derived, in connection with the commission of an offence include a reference to property obtained or to a pecuniary advantage derived, both in that connection and in some other connection.”

The amount of the confiscation order, £1,068,441, was the total of the sums paid into the account (£1,007,0034) less £87,674 (which was agreed to be from sources unconnected with the offence), giving £919,360, which was then adjusted to take account of changes in the value of money as required by section 74 (5) of the Act. It was agreed before the judge to be the correct figure if the prosecution approach to the value of the benefit received by the appellant was right.

The prosecution approach was as follows. Section 71 (1) (a) required the court to be satisfied that the appellant had benefited from the offence. Section 71 (4) which relates to where property is received, then applied to determine whether he had benefited and the amount of the benefit. The appellant had received property as a result of the commission of the offence, or in connection with its commission, namely the monies in the TSB account amounting to £919,360. For the appellant has been able to treat these as his own, and has done so.

The argument before Judge Humphries on behalf of the appellant was that this was not a case falling within section 71 (4) of the Act but was covered by section 71 (5) which relates to where an offender derives a pecuniary advantage as a result of or in the connection with the commission of the offence. The pecuniary advantage was submitted to be the amount of the unpaid corporation tax due on the profits paid into the TSB account namely £450,398. It was submitted that the case was indistinguishable from that in Attorney General v Moran [2001] EWCA Crim 1770, 27 July 2001, unreported.

The judge held that the prosecution’s approach was correct and that the case was covered by section 71 (4). Early in his judgment he stated :

“He diverted the money to a concealed account for his own purposes and failed to declare it to the Inland Revenue.” (page 33H)

Later he stated :

“Money transferred to the account was property obtained in connection with the commission of the offence ….” (Pages 34H, 35A)

The submissions before us have taken the same form. The essential issue is whether the money in the account was, with the exception of the £87,674 referred to above, money obtained by the appellant as a result or in connection with the offence, within the meaning of section 71 (4).

The Particulars of Offence given in the indictment read :

“PARTICULARS OF OFFENCE

JOHN JAMES FOGGON and JENNIFER AILEEN SPENCER between the 1^st day of June 1990 and 31^st day of October 1998 with intent to defraud and to the prejudice of Her Majesty the Queen and the Commissioners of Inland Revenue cheated Her Majesty the Queen and the Commissioners of Inland Revenue of public revenue namely income tax and corporation tax and interest thereon by

(i)

diverting company income of Vaclensa Limited to their own use.

(ii)

diverting company income of Vaclensa Plc to their own use.

(iii)

failing to disclose to the Commissioners of Inland Revenue the existence of untaxed profits of Vaclensa Limited.

(iv)

failing to disclose to the Commissioners of Inland Revenue the existence of untaxed profits of Vaclensa Plc.”

We mention that the prosecution ultimately offered no evidence against Jennifer Spencer and she was acquitted.

The offence was thus stated to comprise the diversion of monies coupled with the failure to disclose. If the diversion of the monies was an essential part of the offence and properly included in the particulars in the indictment, it becomes impossible to say that the monies appropriated by the appellant were not properly obtained as a result of it. No objection was ever taken to the form of the indictment : we do not suggest that it should have been.

The prosecution case was as stated, that all the money in the account, with the exception noted, was property received by the appellant. The basis of this was that he had had control of the monies and the ability to use them for his own purposes as he chose. As a statement of fact, that was not challenged before the judge and was accepted by him. There is a suggestion in the papers that some part of the monies in the account were used for the proper purposes of Vaclensa. This could have permitted an argument that these monies should have been deducted as not being property obtained by the appellant. But the sum was not identified before the judge and the argument was not pressed before him. No particular sum could be identified before us: the schedule which purported to do so, emanating from the appellant’s accountants, appeared to relate to something else. In any event the sum was but a small proportion of the total, and the prosecution approach that in the circumstances the whole of the monies in the account should be treated as obtained by the appellant was right. There was no other basis on which the judge, or this court, could proceed.

It was submitted on behalf of the prosecution that, even if the appellant had only appropriated, for example, half the monies in the account for his own use, and the balance had been properly used for the company’s purposes, albeit undeclared for tax, in the circumstances he should be treated as having obtained the whole for the purpose of section 71 (4). We would simply say that in such a situation is seems to us arguable that the appellant would have “obtained” only the proportion of the monies in the account which he appropriated to his own use. But that is a long way from the actual situation here.

Even if the approach is taken that there were in reality two offences here, first cheating the Revenue, second stealing monies from the company, this would not assist the appellant. For the removal of the greater part of the monies from the TSB account for the appellant’s benefit would have been an essential part of an overall scheme having the combined purpose of defrauding the Revenue and benefiting him. On this approach the monies he obtained would still be monies obtained in connection with the commission of the offence of cheating the Revenue. We need say no more as to the effect of section 102 (5) than that on the basis considered in this paragraph, it could only assist the prosecution.

It is therefore to be concluded that the present case falls within section 71 (4) as the judge held and that he correctly assessed the benefit.

The suggestion made on behalf of the appellant that his case fell within section 71 (5) relating to pecuniary advantage, and that the advantage derived by him was the unpaid tax, namely £450,398, has insuperable difficulties. The tax was not due from the defendant. It was due from the company, Vaclensa. At the most, as a 55% shareholder it was to his financial advantage if the company avoided tax. The pecuniary benefit to him of it doing so would be a matter of calculation, and the calculation might not be straightforward. It seems to us that the tax avoided, or attempted to be avoided, will only be a pecuniary advantage obtained by the offender in two situations. One is where it is tax for which he himself is liable. That was the situation in Moran. The other is where any companies involved are fronts for the offender and it is appropriate to pierce the corporate veil. That was the situation in R v Dimsey & Allen [2001] 1 Cr. App. R (S) 497. In that situation too, it becomes his tax.

In Moran the defendant was a market trader. He traded in his own right. There was no company. There was no misappropriation of money. For 20 years he understated his income on his tax returns. He was charged with cheating and making false statements. In confiscation proceedings it was alleged that the benefit he had received was the whole of his undeclared profits - £386,584. The judge rejected that submission and made a confiscation order in the sum of £190,000 representing under payment of tax and interest. The issue was referred to the Court of Appeal by the Attorney General. In giving the judgment of the court, Mantell LJ. stated at paragraph 8 :

“8.

We have little help from authority. What is plain and has been accepted before this court as it was before the Judge is that we are dealing with a pecuniary advantage. On the face of things the pecuniary advantage would seem to be represented by the underpayment of tax which resulted from the failure to fully disclose profits. On the wording of the Act the pecuniary advantage must be taken to include any interest accrued or investment returned upon that sum. Giving the words of Act their ordinary and natural meaning it is hard to see how the balance of the profits which are the product of lawful trading can be said to represent a pecuniary advantage which has resulted from or come about in connection with the commission of an offence. We reject Mr. Perry’s argument that where there has been systematic and persistent non-disclosure of profits the whole enterprise is to be regarded as fraudulent and the proceeds liable to forfeiture. It seem to us, therefore, that, authority apart, the judge was plainly right.”

In Dimsey & Allen (which preceded Moran) Allen was convicted of 13 counts of cheating the public revenue in an amount of £4 million. The main point that was argued was that a failure to pay tax did not amount to a pecuniary advantage for the purpose of section 71 (4) of the Act because the tax remained payable. The court held that the deferment of payment of tax was a pecuniary advantage in the amount of the tax deferred. Laws LJ. stated at page 501 :

“Had these very grave frauds succeeded then, in crude terms, Mr. Allen would have been better off to the tune of £4 million. That represents in our judgment, the measure of his pecuniary advantage.”

A second point was dealt with briefly. It was that the tax liability was not the liability of Allen but that of a number of offshore companies, and that any pecuniary advantage arising from the withholding of the tax would be their advantage and not Allen’s. Laws LJ. stated at page 502 :

“However, it is plain from the authorities cited by the Crown that the corporate veil may fall to be lifted where companies are used as a vehicle for fraud. Here the companies in question were the appellant’s alter ego: we refer to our judgment of July 7, 1999 for the full facts.”

That judgment dealt with the appeals against conviction, and contained a full statement of the facts.

In conclusion on this aspect of the appeal, where a person misappropriates money from a company as an essential part of a fraud on the Inland Revenue, and is convicted of that fraud, he is liable to a confiscation order in the amount of the monies which he has misappropriated on the ground that the monies are property obtained as a result of or in connection with the fraud.

After the Inland Revenue had discovered what the appellant had been doing, he was anxious that the outstanding tax should be repaid. In December 2000 a cheque of £250,000 drawn on Vaclensa’s account was proffered to the Inland Revenue. As the Revenue had already decided to seek a confiscation order against the defendant it was returned. The defendant was advised that, if he wished to make a payment on account of any confiscation order which might be made against him, payment could be made to the Manchester Magistrates Court. In addition to a cheque from Vaclensa being offered to the Revenue on account of corporation tax, a cheque from Vaclensa was offered to the Commissioners of Customs and Excise in the sum of £125,000 on account of value added tax. This cheque was accepted. Vaclensa’s liability for VAT was thereby reduced by that sum.

It was argued before us that the sum of £1,007,034 in which the confiscation order was made should be reduced to take account of this payment. The argument was put on the basis that the money in the TSB account was partly VAT money and so the appellant did not get the benefit of it. The factual answer is that he did. He appropriated the money in the account and had the benefit of it, regardless of whether it was notionally VAT money or not. Meanwhile Vaclensa remained liable for the VAT.

This point was not raised before Judge Humphries. It was advanced to us on the basis that the judge should have exercised his discretion arising under section 71 (1) of the Act (prior to amendment) to exclude the VAT “element” of £125,000. We are satisfied that for the reason set out in the previous paragraph the proper exercise of the judge’s discretion would have been to take no account of the payment made by Vaclensa to the Commissioners after the discovery of the fraud.

The appeal must be dismissed.