Backhouse v HM Revenue & Customs Prosecution Office

Under the Criminal Justice Act 1988, abandoning valuable contractual rights may constitute a gift for confiscation purposes. The assessment must reflect commercial reality at the date of disposal. Relevant considerations include changed circumstances, benefits previously obtained, and substantial existing or future liabilities released or avoided. A transaction that makes commercial sense from the transferor’s perspective is not a tainted gift merely because the rights are abandoned without further payment. The original amount paid for the rights is not automatically credited in valuing the later disposal.

John Backhouse had entered into an aircraft-sharing arrangement with Craig Johnson, who was later convicted of serious revenue offences and became subject to a confiscation order. The respondents claimed that Johnson made a tainted gift when he abandoned his contractual rights in the aircraft. Cranston J ordered Mr Backhouse to pay £268,039: [2011] EWHC 1950 (Admin).

The appeal concerned the valuation of Johnson’s rights and whether the December 2003 termination agreement disposed of them for significantly less than their value. The central issue was whether the agreement made commercial sense in Johnson’s circumstances at that date.

The Court of Appeal unanimously allowed the appeal and dismissed the respondents’ claim.

1. Statutory framework. Sections 74(10) and 74(12) of the Criminal Justice Act 1988 were relevant to whether Johnson had made a gift caught by the confiscation regime. Section 102(1) defined property broadly. The appellant did not dispute that abandoning a valuable contractual right could, in principle, constitute a gift of property.
2. Valuation. The issue had to be assessed from Johnson’s perspective in December 2003. There was no justification for adding back the $637,462 paid in December 2001 when valuing the later disposal. That payment related to the original acquisition of the 50 per cent aircraft interest, whereas the relevant question was the commercial effect of the later termination.
3. Commercial reality. By December 2003 Johnson’s circumstances had materially changed. His use of the aircraft had declined, he owed substantial sums for engine-overhaul and other expenses, remained liable for half the mortgage debt, and faced continuing liabilities. The termination released him from substantial existing and future obligations. It therefore made good commercial sense and was not shown to be a disposal for consideration significantly less than the value provided. No tainted gift was established under sections 74 and 102.
4. Procedural guidance. Aikens LJ, agreeing with Pill LJ, stressed the importance of clearly defining issues in complex civil claims under the Proceeds of Crime Act 2002 and its statutory predecessors. Points of claim and defence, and where appropriate a formal list of issues, should be considered. The procedural complaint was not separately determined because the appeal succeeded on the merits.

The order requiring Mr Backhouse to pay £268,039 was set aside and the claim was dismissed.

• Court of Appeal (Civil Division): Appeal allowed and claim dismissed, [2012] EWCA Civ 1000.
• Administrative Court: Cranston J ordered Mr Backhouse to pay £268,039 to the respondents, [2011] EWHC 1950 (Admin).