James & Anor v R

The appellants appeal with leave against confiscation orders made by HHJ Goodin at Ipswich Crown Court on 8 December 2010 after a five day hearing. The appeal concerns only the benefit figure. In the case of the appellant James, the benefit figure was £159,521.00. In the case of Blackburn the figure was £135,371.00. Both figures were said to represent the benefit from their criminal conduct. No reliance was placed on the criminal lifestyle provisions.

This is another confiscation case involving tobacco, this time hand rolling tobacco (HRT).

The benefit figure represented in large measure unpaid excise duty on over 1000 kilos of HRT which was found in a factory or in a garage to which it had been sent from the factory for processing or which had passed through either of the premises”. The unpaid excise duty was £119,748.18 which had increased because of the change in value of money to £127,503. That figure of £127,503 was held by the judge to be part of the benefit figure for both appellants. Given that the appellant had realisable assets it seems likely that, if the order is not quashed, there would be full, or almost full, double recovery (Footnote: ¹). If that were to happen the state would receive twice the amount of the unpaid duty. In May [2008] UKHL 28; [2008] 1 AC 1028; [2009] 1 Cr App R (S) 31, Lord Bingham said:

No claim was made for any benefit arising from sales of any HRT.

The raw tobacco was delivered to the “factory”, namely an industrial unit in Stevenage, where it was processed in a machine that produces tobacco that can be smoked and can be sold as HRT. Blackburn was the “manager” of the factory. From the factory the tobacco went in boxes to the garage adjoining the home in Essex of the appellant, James. There it was put into, or was to be put into, 50 gram counterfeit plastic pouches to be sold under a well known trade name.

Duty becomes payable at the moment tobacco is processed into a smokeable condition. Thus duty was payable as it came out of the machine or a little later. The tobacco was smokeable by the time that it was packed into the boxes before leaving the factory. This is now accepted on behalf of Blackburn.

The judge, at the request of the prosecutor, added a figure to the unpaid excise duty a figure to represent expenses which it was said the appellants had incurred. Thus, for example, Blackburn had bought scales, saw blades for the machine (£50), had paid some rent, had paid money out as wages to those working in the factory and had paid other miscellaneous expenses and that was held to be a benefit, in the total amount of £6960.00, increased to £7411.00 by reason of a change in the value of money. For reasons which will be given by Mr Justice Edwards-Stuart, those expenses cannot to be treated as benefit and to that extent the benefit figure was wrong.

That leaves the unpaid excise duty.

We shall set out the facts and background in a little more detail.

On 18^th March 2008 in the Crown Court at Ipswich (HHJ McKittrick) the appellants were convicted of conspiracy to contravene section 170 of the Customs and Excise Management Act 1970. Blackburn was sentenced to 3 years’ imprisonment and James to 2 years’ imprisonment.

Unfortunately much time passed before the confiscation hearing took place (albeit for good reason) and HHJ McKittrick was unable to hear the confiscation applications.

The two appellants and their co-accused were involved in a conspiracy to evade duty payable on hand rolling tobacco indicted between 7^th May and 11^th August 2006. There were two known premises involved, one being a fully operational tobacco factory in a large outhouse (unit 15) at a poultry farm in Stevenage which received boxes of raw leaf tobacco. This was treated with liquid chemical and processed through an industrial tobacco cutting machine into processed hand rolling tobacco. The processed product was packed into smaller boxes and sealed. These boxes were then transported by Charles to second premises, the garage of 29 Rockingham Avenue, Hornchurch, Essex. The boxes were opened, the tobacco weighed and put inside counterfeit 50 gram tobacco pouches for sale. There was no direct evidence as to who had done that, but, given the jury’s verdict, James must, at the least, have allowed that to happen knowing that HRT on which no duty had been paid was being packaged in his garage.

Unit 15 was raided on 10^th August 2006 by HMRC officials and Blackburn was one of four men arrested there.

The same afternoon James was arrested at the Hornchurch premises which he owned. A co-accused Charles, who died prior to trial, was also arrested there having that day, as he had earlier, driven a van containing boxes of processed tobacco onto the driveway. HMRC officials seized 3.027 tonnes of raw leaf tobacco from Unit 15 and a total of 521.9 kilograms of processed hand rolling tobacco either from the factory or the van. 43,000 empty counterfeit pouches were seized from the garage or the back of the van.

Unit 15 had been rented by a man giving the name Peter Ward from 8^th May 2006 at a rent of £500 per month. A total of £2,500 was paid in cash. The unit was modified by upgrading the electrical supply and building a partition wall. A man giving the name Ray contacted the lessors over a drainage problem. The contact number he gave was that of Blackburn’s mobile phone. Officers had kept surveillance on the various conspirators between 13^th June 2006 and 10^th August 2006. On 9^th August officials also placed hidden visual recording equipment in Unit 15. Blackburn declined to answer questions in interview stating he did not have his medication and felt stressed and tired. He declined to suspend the interview to give him the opportunity to see a doctor. James agreed that 29 Rockingham Avenue was his home and was self employed. He said that he had allowed people to store items in his garage because he had been in trouble and someone had sorted it out for him. He declined to answer further questions.

As against James, the prosecution relied on three withdrawals of £10,000 in cash withdrawn on 8^th June, 7^th July (two days after the transfer of some of the HRT from the factory to the garage) and 10^th August 2006 (the day on which James and Charles were arrested, as well as the other defendants).

In R v Smith [2001] UKHL 68, [2002] 1 Cr App R 35, [2002] 1 WLR 54 the House of Lords held that an importer of uncustomed goods, in this case cigarettes, who intends not to enter them for customs purposes and not pay any duty on them, derives a benefit under section 74 of the Criminal Justice Act 1988 through not paying the required duty at the point of importation, where the goods are forfeited by HM Customs following importation, before their value can be realised by the importer.

In Waya, UKSC 2010/0088, which will be re-argued before nine Justices of the Supreme Court next year, the parties have been sent a note which, amongst other things, asks the question: “Did Parliament intend that confiscation proceedings should be brought in respect of property that has been restored by or recovered from the defendant.” (Footnote: ²) The note also states that “it may be that the Court should reconsider” whether Smith was correctly decided.

Only the person or persons who are personally liable to pay the duty will have obtained a pecuniary advantage by evading its payment. Absent that liability, they will not have obtained a benefit in accordance with section 76 of the Proceeds of Crime Act, 2002 and its predecessors. This was established by the House of Lords in May; Jennings [2008] UKHL 29; [2008] 1 AC 1046; [2008] 2 Cr App R 29 and applied in Chambers [2008] EWCA 2467 and Mitchell [2009] EWCA Crim 214.

However, it does not follow from the fact that a person evades the duty which he personally owes, that he has necessarily obtained a benefit by evading it. We shall come back to that shortly.

It is not disputed that a person holding the tobacco products at the excise duty point, namely at or shortly after the tobacco emerged form the machine, is the person holding the tobacco products at that time or any person who caused the tobacco products to reach the excise duty point whilst retaining a connection with the goods at that point: see the Tobacco Products Regulations 2001 2001/1712, the validity of which and the meaning of which was discussed in White and others [2010] EWCA Crim 978, paras. 56 and following. There can be more than one person who owes the duty and, under the Regulations, each is liable jointly and severally. However, HMRC can only recover the amount of the duty owed. There can be no double recovery. The word “holding” has not been authoritatively determined but a person would “hold” the HRT if he owned it or probably had possession or control.

James would have been liable to pay the duty if he was holding the tobacco products at the time that excise duty became payable or if he caused the tobacco products to reach the excise duty point whilst retaining a connection with the goods at that point of time. In order to satisfy either requirement it would have to be shown by the prosecution, on the balance of probabilities and on the facts of this case, that James had, contrary to the evidence which he gave, some financial stake in the illegal operation. If he was a part “owner” of the tobacco, that would suffice.

We turn to the ruling of HHJ Goodin. He held that James was the provider of accommodation and facilities for packing and distribution and this was crucial to the success of the enterprise. The judge went on to say:

The prosecution accept that the judge was wrong to make the finding that James was a visitor for planning meetings. The only evidence from which the presence of James at the factory could be inferred was the sighting on one occasion, the 29^th June 2006, of his Cherokee jeep at the factory. James was himself not seen there. James gave an explanation for the presence of his jeep there - it was being driven by Charles, the co-defendant who had died and who drove the tobacco (albeit not in the jeep) from the factory to the garage. If the judge was going to rely on that one sighting from which to infer that James had attended a planning meeting and was responsible for causing the tobacco to arrive at the duty point because he had “helped”, then the judge should have given reasons for not accepting the evidence of James.

The judge went on to hold in one sentence that that the three sums of £10,000 withdrawn on 8^th June, 7^th July and 10^th August were payments “for or associated with tobacco produced at the factory”. The appellant gave evidence that he withdrew the sums to gamble with bookmakers and had produced to the judge a considerable body of documentary evidence which showed that he was a heavy gambler and had made numerous withdrawals of cash in large and round sums of money both before and after these withdrawals. The judge accepted that James “may well” have been a gambler and gave no reasons for his conclusion. Furthermore the evidence relating to the withdrawals relied upon by the appellant was introduced at the trial. That is important because the trial judge, having heard that and the other evidence, concluded in his sentencing remarks that the role of James was to allow his premises to be used as a base for the distribution of the processed tobacco and that James had played a lesser role than Blackburn. The trial judge said that it was plain that James was responsible for distribution as opposed to processing and that: “Never shall processing and distribution meet.” If HHJ Goodin was right, then the trial judge should have sentenced James as a financier of the unlawful enterprise whose responsibility was greater than that of Blackburn. Whilst not saying that a judge hearing a confiscation case may not reach a different conclusion than the trial judge, the confiscation judge will normally be expected to explain far more fully than did HHJ Goodin why he has reached a different conclusion on the same evidence considered by the trial judge. This HHJ Goodin did not do.

This is not a case where it would be right for the Court of Appeal to conduct a completely new hearing on the issue of benefit and we therefore quash the finding of benefit in so far as it related to evaded excise duty. The judge also held that the £30,000 (uplifted to represent a change in the value of money) was a benefit. For the reasons which Mr Justice Edwards-Stuart analyses and rejects below, the judge was in any event wrong to find this sum to be a benefit even if it had been used to fund the operation. It follows that the confiscation order made against James is quashed.

In this part of the judgment we deal only with that part of the alleged benefit which represents the evaded duty.

Blackburn’s role was set out in an agreed note prepared for the confiscation hearing. That reads:

The effect of this agreed note is that Blackburn was in effect the local “salaried” manager of the factory with no proprietary interest in the tobacco. It might have been agreed or, if not agreed, decided that the £6960.00 which Blackburn spent on miscellaneous expenses was an investment by Blackburn in the unlawful enterprise. However it was agreed that was no evidence that Mr Blackburn financed the purchase of the raw leaf tobacco. It must follow that it had to be assumed that that Blackburn expected to be reimbursed for the expenses, albeit that there was no evidence that he was reimbursed.

Was Blackburn either holding the HRT or did he cause the tobacco products to reach the excise duty point whilst retaining a connection with the goods at that point of time? In Mitchell [2009] EWCA Crim 214, a post Chambers decision discussed in White and others in paragraphs 105-115, the Court said that they had not heard full argument on the point but that it appeared that the words causing the tobacco products to reach the excise duty point were directed at the person who had real and immediate responsibility for causing the product to reach that point. In paragraph 115, the Court in White and others said that the correctness or otherwise of this obiter passage might have to be considered should the point arise. One of the problems for criminal courts in this area is that any interpretation given to the Regulations must be the same as the interpretation that would be given to the Regulations in civil proceedings (court or tribunal) concerning excise duty. Furthermore when construing the word “cause” in criminal cases, it is normally given a broad meaning: see Williams, [2010] EWCA Crim 2552; [2011] 1 W.L.R. 588, applied in H [2011] EWCA Crim 1508.

Whatever the precise meaning of the words “holding” and “causing”, it seems to us that the appellant as the local manager albeit with no ownership of the tobacco falls into one or both of these categories. The judge was therefore entitled to find that he caused the tobacco to arrive at the duty point.

The judge took the view that, having found that Blackburn caused the tobacco to arrive at the duty point, he had obtained the benefit in that amount. It is submitted on behalf of Blackburn that he was wrong to so find in the light of May and Sivaraman [2008] EWCA 1736; [2009] 1 Cr. App. R. (S.) 80; [2008] Crim. L.R. 989.

In May Lord Bingham, giving the opinion of the Appellate Committee, said (paragraph 48(6)):

Blackburn, on the agreed facts, had no interest in the tobacco or the proceeds of sale. On the other hand he was more than a courier or custodian and it would be difficult to categorise him as a very minor contributor to an offence.

In Jennings the House of Lords said:

In this case Blackburn, if not repaid the £6960.00, had lost that money and had made no money at all, given that HMRC had intervened before any distribution had effectively taken place.

We turn to Sivaraman. The appellant was the manager of a service station who accepted deliveries of “off road” diesel fuel on behalf of his employer, which was then sold to customers without the payment of duty. The Court (Toulson LJ, Jack J and HHJ Mettyear) held that his benefit was the amount paid to him by his employer for his participation in the scheme, not the duty evaded. The respondent seeking unsuccessfully to uphold the confiscation order made against the appellant which reflected the duty evaded, argued that, applying the passage in May (paragraph 34 above), the appellant was not a mere minor contributor but that he played a significant role as the petrol station manager. As to this the Court said:

The Court asked whether the appellant was a joint purchaser of the fuel for resale as DERV who, by his conduct, jointly gained the pecuniary advantage of being able to resell it as DERV without having incurred the duty which would have had to be paid on purchasing DERV; or was he acting just as an employee? The Court held that he was the latter and quashed the confiscation order.

In the light of Sivaraman, it seems to us that Blackburn’s appeal against the confiscation order in so far as it represented the unpaid excise duty must succeed. In these circumstances we do not need to address the post hearing submissions that were sent to us on the question of whether or not Blackburn had the necessary intent to evade the duty.

We turn now to the question of the expenses incurred by Blackburn. Blackburn's case was that he was never reimbursed for these expenses, and there was no evidence or finding to the contrary. We therefore proceed on this basis.

The expenses in question fall broadly into three types. First, the purchase of equipment or materials for the purpose of the venture. Second, payments by way of rent for Unit 15, “the factory”. Third, payments for casual labour for work in connection with the venture. In all, these amounted to about £7,000. For convenience, we will set out below those provisions of the Proceeds of Crime Act 2002 (“POCA”) that are of particular relevance to this issue, bearing in mind that the exercise that the court is undertaking is to decide whether the appellant has benefited from his particular criminal conduct: see section 6(4). Section 76 of the Act provides:

A person benefits from 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. (Emphasis added)

Section 84 of the Act provides that property is held by a person if he holds an interest in it.

It was not disputed that Blackburn purchased these items, which included things such as weighing scales, cardboard boxes and sundry building materials, from ordinary commercial suppliers in the usual way. He paid in cash. In relation to the cardboard boxes and packaging tape, it was said that he asked the supplier if the transaction could be done "without a ticket", but the request was refused.

In our judgment it is quite clear that these were ordinary everyday transactions that were perfectly lawful in themselves. True it is that Blackburn intended to use these items in an unlawful venture, but there is no reason to believe that that would have been known to the supplier. If, for example, on returning to the factory Blackburn had discovered that the cardboard boxes were damp, there would probably have been nothing to prevent him from returning to the supplier and rejecting them, demanding the return of the price. The supplier would not have been entitled to refuse on the ground that he had since learned that Blackburn wanted the boxes in order to transport illegally processed tobacco products, because Blackburn did not have to rely on any particular purpose for which he bought the goods in order to complain that they were not of merchantable quality. (Footnote: ³)

There is no suggestion that Blackburn paid anything other than the normal retail price for any of these items. At the outset we remind ourselves of the summary of the relevant principles given by the House of Lords at the conclusion of its opinion in R v May [2008] 1 AC 1028, which included the following passage:

Looking at the matter broadly and addressing the first of these questions, we do not see how it can be said that Blackburn derived any benefit from buying these items. He paid for them and received goods in return to the same value. He gained nothing (in monetary terms) by the transaction. There was no pecuniary advantage. In these circumstances, it would be strange if the relevant legislation compels the conclusion that he had derived a benefit, measurable in money terms, from these transactions.

We do not think that the relevant provisions of POCA do compel this conclusion. First, Blackburn did not obtain the items as a result of any criminal conduct. He obtained an as a result of a lawful transaction with the supplier.

Second, he did not obtain the items in connection with any criminal conduct. His criminal conduct in participating in the conspiracy formed no part of the transactions by which he acquired the various items. Their acquisition was by way of lawful purchase for value. We accept that these transactions were entered into for the purpose of criminal conduct, but that is not necessarily a state of affairs caught by section 76(4).

We accept also that the expression "in connection with" widens the meaning of the words "as a result of": see R v Waller [2009] 1 Cr App R (S) No 76, at page 450. In our view, the expression was probably intended to cover the type of situation where a person obtains property in anticipation of the criminal venture. For example, suppose that A is provided with a car (which is registered in his name) by someone planning a criminal venture, ostensibly for A’s own use but really with a view to him using it also in order to act as a courier to transport illegal tobacco products for that criminal venture. In this situation it is clear that A has obtained the car in connection with his subsequent criminal conduct of transporting the illegal goods, although it may be open to argument whether he also obtained the car as a result of any criminal conduct.

In fact, this example is very similar to the facts of the leading case of R v Smith, which we have already mentioned. Smith bought a motor vessel with £55,000 provided by his co-defendant, John Marriott. Smith effectively acted as Marriott's shipowner and captain. When, as part of a smuggling operation, the vessel was sailed up the Humber estuary laden with cigarettes on which duty had not been paid, the benefit that he was found to have obtained from his criminal conduct included not only the duty evaded on the cigarettes but also the value of the vessel. That was because he had obtained the vessel in connection with the commission of the offence. Whilst this decision may have its critics on the ground that the defendants were treated as having benefited to the full extent of the amount of the duty evaded whilst having been deprived of the opportunity to sell the cigarettes, we do not understand there to have been any criticism of the conclusion that the vessel was properly treated as property obtained in connection with a commission of an offence (a point which was not argued in the House of Lords).

We were referred by Mr Abell to the decision of R v Waller, to which we have referred briefly above. The defendant was stopped at the Channel Tunnel by British customs officers, who found 250 kg of undeclared hand rolling tobacco in the boot of his car. The defendant admitted to buying the tobacco for himself, his family and his friends. He said that he had spent £2,000 of his own money and £12,000 given to him by three other people. He accepted that he bought the tobacco with the intention of evading duty.

In the subsequent confiscation proceedings the Crown contended that the defendant’s benefit amounted to £41,505, being the total of the evaded duty of £27,505 and £14,000, being the value of the cigarettes. The issue on the appeal related to whether the confiscation order should have included the value of the tobacco as well as the evaded duty. The case for the defendant on this aspect was that the judge should not have included the value of the tobacco as it had been purchased legitimately. The Crown’s response was that the whole enterprise was one tainted with criminal intent (Footnote: ⁴) from its outset since, without dutiable goods to smuggle, there can be no pecuniary advantage.

The court gave six reasons in support of its conclusion that the judge was right to make a confiscation order not merely that the value of the duty but also the value of the tobacco. The first reason was based on the concluding paragraph of the judgment of the House of Lords in May, which stated:

The third reason was expressed in the following terms:

It is clear on the facts of that case that the enterprise demanded the prior purchase of the tobacco outside the United Kingdom with the consequence that it was obtained “as a result of” the criminal conduct, namely the smuggling enterprise. It is evident also that it was obtained "in connection with" the smuggling enterprise, since the tobacco was itself the subject of the operation. Leaving aside the defendant’s admission, it was not as if there could have been any other conceivable reason for buying such a large quantity of tobacco outside the United Kingdom: the defendant and his friends could hardly have wanted to buy it just in order to set up a stockpile of tobacco on the mainland of Europe.

However, the decision is not without its critics: see Archbold, 2012 Edn, at 5-1051, where the editors refer to an article in which the decision is criticised on the grounds that it misapplies May and is out of line with Smith (because in that case it was never suggested that the benefit included the value of the smuggled goods).

We consider that there is a significant difference between the purchase of the tobacco in Waller and Blackburn's purchases of the various items with which we are concerned in this case. Mr Waller's purchase of the tobacco was central to the smuggling operation on which he had embarked since the tobacco in question was the very thing that was to be smuggled. In those circumstances it is unsurprising that the court concluded that the purchase of the tobacco was in connection with the criminal conduct: it formed part of it.

Turning now to the judgment in the present case, the judge dealt with the issue of the outlay on the purchase of equipment for the enterprise, such as the scales, boxes and so on, in a single sentence. He said, very simply, that those expenses "are in my judgment caught by the legislation". He gave no reasons.

For the reasons we have given, we consider that the sums spent by Blackburn on the purchase of equipment or materials for the purpose of the venture are not caught by the legislation. Accordingly, they did not form part of the benefit.

We should add that the Crown did not seek to include in the assessment of the benefit to Blackburn any sums in respect of either the raw tobacco that was found at the factory or in respect of the HRT that was produced or seized. It is not obvious to us why the Crown chose to omit these whilst including the items purchased by Blackburn.

As the agreed statement of Blackburn’s role records, he paid some of the rent for Unit 15 during the relevant period (£2,000, according to his notes). As we have already mentioned, a man giving the name Peter Ward rented the unit from 8 May 2006 at a rent of £500 per calendar month (this was stated in the Crown’s opening note for the trial).

In Jennings the House of Lords held that “obtains” must ordinarily mean obtaining property so as to own it, thereby ordinarily connoting a power of disposition or control. Since it appears that the agreement to rent Unit 15 was not in Blackburn's name, or at least the Crown did not prove that it was, it seems to us that the payment of the rent did not confer on Blackburn any right of disposition or control over the unit.

The most that can be said is that the payments of the rent enabled “Mr Ward” to continue to enjoy the rights under the agreement with the lessor. Whilst it may be argued that he (Ward) thereby obtained property, we consider that the relevant evidence, namely that Blackburn paid the rent for certain months out of his own pocket, fell short of establishing that Blackburn obtained any property, or any property rights, that amounted to a benefit.

However, if we are wrong about this, for much the same reasons that we have given in relation to the purchases of the items of equipment, we would have concluded that these payments in respect of the rent were not made in connection with the criminal conduct within the meaning of the legislation (we are assuming, because there was no evidence to the contrary, that the rent was in line with prevailing market rates). It is true that Unit 15 was rented for the purpose of enabling the criminal conduct to take place, but the arrangement to rent it was a contract that was not in itself in any way unlawful. Unlike the tobacco in Waller, the unit could have been put to another purpose or those controlling the enterprise might have changed their minds - perhaps because they thought that Unit 15 was under observation - and decided at the last minute to terminate the arrangement and to use another building.

We accept that, because the payment of rent was a continuing outlay, the connection to the criminal conduct is closer than in the case of the individual expenses. However, since this is a criminal statute and the confiscation process is not to be applied so as to operate as a fine (see Jennings, at paragraph 13), we consider that the words “in connection with” must be given a narrow construction provided, of course, that such a construction is consistent with the ordinary use of the statutory language. In these circumstances and for the reasons that we have given we consider that by paying the rent Blackburn did not obtain a benefit that is caught by the legislation.

Mr Abell submitted that in paying for the casual labour Blackburn obtained a pecuniary advantage and that this advantage was gained in connection with the criminal conduct.

In R v Olubitan [2004] 2 Cr App R(S) No 14, May LJ said, at page 78:

In our judgment, Mr Abell’s submission falls at the first fence. We cannot see how a person who pays for services at a market rate can be said to have obtained a pecuniary advantage. It seems to us that, in terms of gain, the transaction is financially neutral.

It may be that, if one looks at it from the other end of the telescope, one could say that the men engaged to work at the factory on a casual basis thereby obtained a pecuniary advantage in the sense that they received money in return for their labour. (Footnote: ⁵) But whether or not that is the case, it is hard to see how the employer obtains a similar pecuniary advantage in circumstances where (a) he obtains no money as a result of the transaction and (b) the labour he obtains is paid for at the going market rates.

We conclude that none of the items of expenditure incurred by Blackburn that were treated as part of the benefit in the confiscation proceedings was caught by the legislation. Accordingly, that part of the decision of HHJ Goodin must be set aside.

It follows that the confiscation orders in respect of both appellants are quashed.