SPC00543

Proceeds of Crime Act 2002 - Assessment as trading income not as “Other Income” - no trade on facts – Assessment not saved by s 319(2) as not “Other Income” – Appeal Allowed

BEFORE THE SPECIAL COMMISSIONERS			                    SC/3154/2004

	JOHN GEORGE ROSE	    Appellant

	- and -

	THE DIRECTOR OF THE ASSETS RECOVERY AGENCY	   Respondents

		        Special Commissioner: ADRIAN SHIPWRIGHT

Sitting in public in London on 24 March 2006

Richard Wormold, Counsel for the Appellant

R Smith Legal Section, Assets Recovery Agency

© CROWN COPYRIGHT 2006

DECISION

Introduction
1.	This is an appeal by John George Rose (“Mr Rose”) against Estimated Notices of Assessment raised by the Respondent (“ARA”) for the years of assessment 1997-1998 to 2002-2003 to income tax under Schedule D Case 1 and for National Insurance Contributions.  These were made on the basis that Mr Rose’s income exceeded that returned for 2000-2001 and 2002-2003 by extrapolation to the other periods.
The Issue
2.	The issue between the parties in this case is whether Mr Rose can show he was not correctly assessed under Schedule D Case 1 for the years of assessment in question.  Essentially, this resolves itself into the question whether the drugs in the garage were on the balance of probabilities Mr Rose’s for dealing or for his own  or someone else’s use.
3.	This case is concerned only with income tax matters and not matters of criminal law. It is a civil case to which the civil standard of proof applies.
The Law
4.	Under Part 6 of the Proceeds of Crime Act 2002 (“POCA”) the ARA is able to assume the functions of the Inland Revenue (now HMRC) if the qualifying condition in section 317 POCA is satisfied.
5.	The condition in section 317 POCA is set out in subsection (1) and is that
“For the purposes of this section the qualifying condition is that the Director has reasonable grounds to suspect that -
(a)     income arising or a gain accruing to a person in respect of a chargeable period is chargeable to income tax or is a chargeable gain (as the case may be) and arises or accrues as a result of the person's or another's criminal conduct (whether wholly or partly and whether directly or indirectly), or
(b)     a company is chargeable to corporation tax on its profits arising in respect of a chargeable period and the profits arise as a result of the company's or another person's criminal conduct (whether wholly or partly and whether directly or indirectly)”.
6.	There was no issue raised as to whether this condition was fulfilled. For the sake of completeness I record that I consider that it was fulfilled.  No issued was raised as to notices etc to HMRC which I also treat as having been duly given. 
7.	Section 319 POCA is headed “Source of income”. It provides:
“(1) For the purpose of the exercise by the Director of any function vested in him by virtue of this Part it is immaterial that he cannot identify a source for any income.
(2) An assessment made by the Director under section 29 of the Taxes Management Act 1970 (assessment where loss of tax discovered) in respect of income charged to tax under Chapter 8 of Part 5 of the Income Tax (Trading and Other Income) Act 2005 [Income not otherwise charged] must not be reduced or quashed only because it does not specify (to any extent) the source of the income.
(3) If the Director serves on the Board a notice of withdrawal under section 317(4), any assessment made by him under section 29 of the Taxes Management Act 1970 is invalid to the extent that it does not specify a source for the income.
(4) Subsections (2) and (3) apply in respect of years of assessment whenever occurring”.
8.	Section 320 POCA deals with Appeals. By subsection (1) it is provided that  “An appeal in respect of the exercise by the Director of general Revenue functions shall be to the Special Commissioners”. The appeal was thus to the right jurisdiction.
Evidence
9.	 A bundle of documents was produced and not objected to.  The documents were admitted in evidence.
10.	Oral evidence was given by Mr Rose, Stephen Brown, Mr Rose’s present accountant and Jane Richards from the ARA’s office.  Witness statements were provided for Mr Rose and Jane Richards, and were admitted as evidence in chief.  All the witnesses were cross-examined.
Findings of Fact
11.	From the documents and witness evidence, I make the following findings of fact.
12.	Mr Rose and the Drugs
(a)	Mr Rose, as he admitted, previously had a “a drug habit”.
(b)	On 7 December 2000 Mr Rose’s house and adjoining buildings were searched by police acting under a search warrant.
(c)	Money, documents and some controlled substances were seized during the search.
(d)	Mr Rose and members of his family were arrested following the search.
(e)	The controlled substances seized were as to the smaller amount found in Mr Rose’s house.  Mr Rose accepted that these drugs were his and he pleaded guilty to the charge of possessing them.
(f)	The larger quantities of drugs were seized from a detached garage adjacent to the house.
(g)	The garage was used as a workshop and for the ironing business carried by Mr Rose and his wife.
(h)	 The drugs found in the garage were found in Mr Rose’s fishing box.  This was a large plastic box.
(i)	Scales and a large quantity of controlled drugs were found in the box.
(j)	Mr Rose was charged with the supply of controlled substances, but the charge was not proceeded with. The possession charge in respect of the drugs in the house was the charge Mr Rose pleaded guilty to.
(k)	No explanation was given at the hearing of this appeal as to how the drugs got there or who might have placed them there other than Mr Rose.
(l)	Accordingly, I find that, on the balance of probabilities, and in the absence of any other evidence, the drugs in the garage were Mr Rose’s.  I express no view as to whether or not the higher criminal evidential burden would be discharged.
(m)	There was no evidence before me that Mr Rose was dealing in drugs other than the scales in the fishing box.
(n)	I consider that the presence of the scales (which I have not seen) does not of itself make Mr Rose a dealer in the sense of carrying on a trade of dealing in drugs. It was consistent with the drugs being for Mr Rose’s own use or his being a fisherman.
(o)	I find for the purposes of this appeal that the drugs in the garage were Mr Rose’s (as there was no evidence led to the contrary) but that he was not carrying on a taxable trade in respect of them. I do not consider that there was an adventure in the nature of a trade by Mr Rose and so find as a fact.
(p)	This accords with Mr Rose’s replies as recorded in the Premises Search Book which he signed and with his refusal to sign the officers’ notes.
13.	Financial Matters
(a)	On the basis that the drugs in the garage belonged to Mr Rose, the financial aspects can be considered.
(b)	The ARA produced cash statements for the years ended 5 April 2001 and 5 April 2003.  These were extrapolated to the other years in question by reference to the RPI (Retail Price Index).  No objection was taken as to this method of extrapolation.
(c)	The cash statements were derived from the red diary/cash book, the bank statements and other financial statements seized by the police.
(d)	There were certain payments where it was not clear whether they were cash or cheque payments.  Mr Rose had sought the return of the cheques from the bank.  He had been told by the bank that they would be available in a few days time.  It was agreed that Mr Rose could submit these cheques (if received) as further evidence up to and including fourteen days after the end of the hearing, but not thereafter.
(e)	No cheques have been supplied within the period allowed.  I accordingly assume and find that the unclear payments were cash payments. In the event I allowed extra time for cheques to be produced and commented on by both sides.
(f)	On that basis, I accept the revised cash statements produced by Jane Richards, whom I found to be an honest and careful witness.  I also accept her assumptions in making them, including her method of reaching/reading a value for the drugs in the garage. I find she was clearly doing an honest and thorough job and commend her for the clarity of her evidence.
(g)	Mr Rose also had some securities during the period in question. Some of these were disposed of from time to time in that period. These were not the subject of the estimated assessments under appeal. They could have provided the funds for the drugs in the garage if they were Mr Rose’s.
The Submissions of the Parties
Mr Rose’s submissions in outline
14.	Mr Rose accepts that the drugs found in the house were his which is why he pleaded guilty to the charge of possessing them.
15.	 As regards the drugs found in the garage, Mr Rose says he knew nothing about them, he does no know how they got there and they were not his.  In short, Mr Rose denies that the drugs in the garage were anything to do with him.
16.	Accordingly, the drugs from the garage were not his for the purpose of dealing and so cannot affect Mr Rose’s returns as he was not carrying on a trade of drug dealing.
ARA’s Submissions in outline
17.	The ARA’s case was that: 
(a)	the drugs in the garage were Mr Rose’s;
      (b)   Those drugs were:
i.	for dealing purposes; or
ii.	stored for Mr Rose’s drug habit.
(c)   Either way, they had to be paid for and the income declared could not finance   
 those purchases.
(d)	The onus was on Mr Rose to show that the assessments were wrong, which he has failed to do.
(e)	Sections 317-319 POCA allowed the assessment to stand whether or not Mr Rose was shown to be dealing as he must have funded the drugs from the garage somehow.
(f)	Accordingly, Mr Rose was properly assessed and he had not shown otherwise.
Discussion
18.	The ARA have specifically assessed Mr Rose under Case 1 Schedule D. The question arises then whether or not Mr Rose was carrying on a trade of dealing in drugs.
19.	I find as a matter of fact that this was not the case and that on the balance of probabilities there was no trade carried on by Mr Rose. 
20.	The issue then arises whether 319 POCA makes this immaterial and validates the assessment. By section 319(1) “For the purpose of the exercise by the Director of any function vested in him by virtue of this Part it is immaterial that he cannot identify a source for any income”. However, in this case a source has been identified and relied on. It is not an assessment under section 319(2) POCA as it is not an assessment as “Other Income” (previously described as Case VI of Schedule D) but as trading income.
21.	As it has been found as a fact on the balance of probabilities that there was no trade of drug dealing and section 319 POCA does not save them the estimated assessments cannot stand. 
Conclusion
22.	I have found that:
a.	the drugs in the garage are to be treated as belonging to Mr Rose;
b.	I accept the revised cash statements produced by Jane Richards;
c.	 there was no trade of drug dealing carried on by Mr Rose;
d.	The assessments in question were on the basis that a trade was carried on and are not saved by section 319 POCA. 
Accordingly, the appeal is allowed and the assessments discharged.  

ADRIAN SHIPWRIGHT

Special Commissioner

SC/3154/2004                                                 1 June 2006