Part 5 of the Proceeds of Crime Act 2002 (“POCA”) provides powers for the civil recovery of the proceeds of unlawful conduct. This includes the forfeiture of proceeds of crime without the requirement of a prosecution or conviction. Under chapters 2 and 3B of Part 5, law enforcement agencies can also obtain interim freezing orders over property. In fact, chapter 3B, introduced in January 2018 has become an increasingly important tool of the civil recovery framework which can have severe repercussions on property holders. Yet these applications are made and heard in the Magistrates’ Court and are more often than not, ex parte.
Section 303Z1 of POCA provides that where an enforcement officer has reasonable grounds for suspecting that money held in an account is “recoverable property” or is intended for use in unlawful conduct, they may make an application to the Magistrates’ Court for an Account Freezing Order (“AFO”).
The consequences of an AFO are set out in subsection 2: an AFO prohibits a person who operates the account subject to the AFO, or for whom the account is operated, from making withdrawals or payments from the account, and this may be in respect of all or part of the credit balance in the account. As such, like a criminal restraint order, the consequences can be severe, particularly where it is an account held by a company and through which the company conducts its business.
One peculiar feature of Part 5 is that applications are made, and heard, in the Magistrates’ Court. Often, cases involving AFO’s or forfeiture involve significant amounts of money and relate to quite complex issues. In circumstances where these cases are often heard ex parte (as is often the case with applications for restraint orders in the Crown Court), the remedy to set aside a Part 5 order becomes important.
In the recent case of R (Mileage Reclaim Ltd) v. North Somerset Magistrates’ Court, HMRC [2024] EWHC 1531 (Admin), the High Court (Administrative Court) considered the appropriate forum for challenging an AFO in circumstances where there were conceded failings on the part of the law enforcement agency and the Court in the original application for the AFO, and the business of the account holder was being severely impacted.
The Facts
The claimant company, Mileage Reclaim Ltd, trading as Taxbuddi, challenged the decision of the North Somerset Magistrates’ Court to make an AFO, upon the application of HMRC, in relation to two of its bank accounts, pursuant to section 303Z3 POCA. The application was heard ex parte.
An AFO may be made by the Magistrates’ Court if it is satisfied that there are reasonable grounds for suspecting that the monies are recoverable property: section 303Z3(3). The role of the Magistrates’ Court is therefore to decide the question for itself rather than merely to review the opinion of the enforcement officer. This requires a detailed examination by the Court of the material put before it (see paragraph 7). This did not appear to occur in the present case.
Taxbuddi, who had 89 employees when the AFO was made, makes claims for tax rebates on behalf of its customers in respect of expenses incurred in the course of their work. On 22 February 2024, HMRC applied for an AFO against two bank accounts in Taxbuddi’s name: Revolut and Wise Payments Limited. It was through these accounts which Taxbuddi held all its working capital. This meant that employees could not be paid.
HMRC said that they had reasonable grounds to suspect that the monies in the two accounts were obtained by criminal conduct, namely fraud and money laundering. The fraud was described in the supporting statement (which was nine pages with no accompanying exhibit) as follows:
“The account holder Mileage Reclaim Limited is a tax agent that I suspect has fraudulently claimed over £1.7 million in false tax rebates for its customers…by misrepresenting payroll employees as being self-employed and therefore falsely claiming back travel and subsistence expenses that they would not be entitled to…
17. … if the customer is employed on a Pay As You Earn basis, rather than being genuinely self-employed, then any expenses incurred would either be reimbursed by the employer or remain the responsibility of the individual and no tax rebate would be possible.
18. An open source Google search for ‘Mileage Reclaim Limited’ leads to a two year-old video on YouTube with the title ‘Welcome to Mileage Reclaim’ that shows James White advising viewers that if they are a payroll employee who has travelled for work they can claim back those expenses from HMRC. Prospective customers are invited to contact Mileage Reclaim Limited and speak to a tax advisor who will submit a claim to HMRC on their behalf.
19. Again, this advice is not correct. Travel and subsistence expenses for payroll employees are not refunded by HMRC, they would be the responsibility of the individual or remunerated by their employer. Any such claim for expenses would be either in error or fraudulent. I would expect any legitimate tax agent to be aware of this fact.”
Based on this, HMRC sought to freeze £21.7 million as being proceeds obtained by way of tax rebates suspected to be unlawful conduct. The ex parte hearing lasted five minutes. The High Court said at paragraph 26: “There appear to have been no questions about the merits of the application or the consequences of the proposed order for the Claimant’s business, and nor does there appear to have been any consideration of when an application to set aside could be accommodated if the Claimant wished to make one.”
Shortly thereafter, on 3 March 2024, Taxibuddi made an application to set the AFO aside challenging HMRC’s allegations of fraud and pointed out the statement made by HMRC was incorrect to say that PAYE employees could not claim reimbursements of the sort being claimed through Taxibuddi. Four days later, HMRC accepted via a witness statement that they were incorrect. However, they considered the AFO was justified.
There was significant delay with listing Taxibuddi’s application to set aside the AFO for hearing, despite the immense damage it was having on its business. The hearing was ultimately listed for 27 June 2024 some four months after the AFO was made, during which time, according to Taxibuddi, the business had been devastated.
Ultimately, HMRC had conceded that there had been “extraordinary failings” in the original application, including, inter alia, that the application did not contain sufficient evidence to justify the order (i.e. reasonable grounds of suspicion had not be adequately established), the merits were not queried by the Magistrates’ Court, no thought had been given to the impact of the AFO on the business and there had been an error in complying the duty of full and frank disclosure. However, they submitted that these were mistakes and not wilful misconduct.
The Decision
Given the delay, Taxibuddi issued proceedings in the Administrative Court, seeking permission to apply for judicial review, and sought an expedited hearing between 28 May and 7 June 2024. A hearing was listed for 6 June 2024. The High Court refused permission on the basis that Taxibuddi had a suitable alternative remedy in the form of its application to the Magistrates’ Court to set aside the AFO. The better course was to allow the Magistrates’ Court to determine that application rather than for the Administrative Court to intervene:
“…the right to apply to set aside an account freezing order which is provided by section 303Z4 POCA was intended by Parliament to be the remedy available to respondents in the sorts of circumstances which arose in relation to the AFO in this case. Moreover, that remedy is a suitable one.”
It would only be in exceptional circumstances, such as a case raising systemic issues, where judicial review would provide the suitable remedy.
In light of this the High Court did not go on to consider the merits of the claim but said:
“However, it is clear that, at least in relation to the conduct of the 22 February application, there have been serious errors on the part of HMRC and significant procedural failings on the part of the Magistrates’ Court, largely as a result of HMRC’s errors… The delays in the hearing of the Claimant’s application to set aside owing to lack of capacity in the Magistrates’ Court system are also highly regrettable, and I accept that the Claimant’s business and Mr White’s reputation have been seriously damaged by the making of the AFO. Their strong sense of grievance is understandable.”
Comment
It is perhaps surprising that such complex applications with potential to have severe consequences for individuals and businesses can be heard in the Magistrates’ Court. Parliament appears to have preferred the potential for such applications to be heard and orders made quickly (no doubt to reduce the potential for dissipation), subject only to a summary process. Ex parte applications are likely to be easier to list as they do not require argument from both parties or significant reading (depending on the application).
It is equally as important, though, that a respondent is able to obtain the setting aside of an order made ex parte. A hearing of an application to set aside, or even vary, should be readily available. The delay in listing often complex hearings in the Magistrates’ Court, an often-busy court, is therefore disappointing.
It is clear, however, that as many Part 5 POCA applications must be made in the Magistrates’ Court, the most suitable forum to seek a remedy to set an order aside is therefore in the same court.
Mai Holdom – July 2024.
