England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
DIVISIONAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		04/12/2015

Mr Justice Cranston:

Introduction

1. This is a renewed application for judicial review after refusal of permission by Kenneth Parker J whereby the claimant seeks permission to challenge the issue and execution of a search warrant for its premises. The warrant was requested by a German prosecutor under mutual legal assistance pursuant to section 16 of the Crime (International Co-operation) Act 2003 ("the 2003 Act") and section 9 and Schedule 1 of PACE 1984. The claimant is an aviation resources leasing company providing pilots to airlines, in particular, to Ryanair Limited. The Chief Constable of the Surrey Police force applied for, and obtained, the warrant from, the Crown Court sitting at Guildford pursuant to a direction made by the Secretary of State for the Home Department under section 13(1)(b) of the 2003 Act.

Background

2. The request to the UK Central Authority in the Home Office for mutual legal assistance giving rise to this case came from Dr Wolfgang Bohnen, a senior prosecutor in the Office of Public Prosecutions in Koblenz, Germany. There had been an earlier International Letter of Request ("ILOR") on 24 June 2011, which said that the prosecutor was investigating the claimant for the offences of withholding salaries contrary to section 266a, paragraphs 1 and 2 of the German Penal Code, and tax evasion contrary to section 370, paragraph 1, number 2, of the German Tax Regulations. Section 266(a) ("Non-payment and misuse of wages and salaries") provides:

"(1) Whosoever, as an employer, withholds contributions of an employee to the social security system including employment promotion, regardless of whether wages or salaries are actually being paid, shall be liable to imprisonment not exceeding five years or a fine.

(2) Whosoever as an employer

1. makes incorrect or incomplete statements regarding facts relevant to the social insurance system to the agency responsible for collecting contributions, or

2. contrary to his duty withholds from the agency responsible for collecting contributions information about facts relevant to the social insurance system,

and thereby withholds the contributions to be paid by the employer for social insurance including employment promotion, regardless of whether salary or wages are being paid, shall incur the same penalty."

Section 370 ("Tax evasion") provides in its relevant parts:

"(1) A penalty of up to five years' imprisonment or a monetary fine shall be imposed on any person who

1.  …

2.  fails to inform the revenue authorities of facts of substantial significance for taxation when obliged to do so, or

3.  …

and as a result understates taxes or derives unwarranted tax advantages for himself or for another person.

(2) Attempted perpetration shall be punishable."

3. The ILOR explained that in January 2010 the Federal Financial Headquarters West received an anonymous report accusing Ryanair and the claimant of withholding taxes. The person making the report alleged that the claimant was a 'letterbox company' controlled by Ryanair. He said that Ryanair pilots were told to set up their own companies for the receipt of payments. There was also a witness, Mr Van der Zwaal, who explained the actual implementation of the agreement between Ryanair and the claimant. He said:

"All work sequences for the pilots up to their uniforms are specified by Ryanair. Ryanair in particular determines which flights the pilot has to make and when. The contract concluded between [the claimant] and the pilots includes provisions that the pilots are bound to comply with specifications by Ryanair. The witness also stated that he was recruited by Ryanair Limited and received an offer for employment from them once he would have obtained the required aircraft licences. After obtaining this licence, the witness was further trained by Ryanair Limited to comply with Ryanair standards. Only afterwards was he referred to [the claimant] by Ryanair, [the claimant] being the company to finalize the contract formalities by email. The witness never saw any office of [the claimant]."

The ILOR then said that the relationship between the pilots and the claimant should be qualified as pseudo self-employment, even under British law.

"Contrary to the contractual provisions and their actual implementation the agreement states the fiction in Item 1 that the pilot is not considered employed by [the claimant] and Ryanair. In Item 3, the pilot confirms his status as self-employed/sole proprietorship, or a person made available to [the claimant] by a company with limited liability under German law."

4. Then on 8 February 2013, Dr Bohnen sent another ILOR for a search regarding the withholding of salaries and tax evasion. The earlier material was included. The ILOR also stated:

"The search is necessary as the suspects have not provided any information to date."

5. Attached to the 2013 ILOR was an order of the Koblenz Local Court (Amtsgericht), dated 22 January 2013. It concerned preliminary investigations on the grounds of withholding salaries and tax evasion. It ordered the search of the claimant's premises in this country. It named the directors and joint shareholders of the claimant, James Duffield and David George, as suspects. It was based on suspicion of the same offences as the 2011 request. The court said that it was an especially serious case of tax evasion. Under "grounds" it noted:

"Approximately 50% of the pilots working for Ryanair there are made available to Ryanair by [the claimant] International Ltd. It is suspected, quite contrary to Ryanair's statements, that these pilots were independent sub-contractors, that the pilots are employed by [the claimant] and are leased to Ryanair Ltd. by that company.

…

Contrary to the contractual provisions and their actual implementation the agreement states the fiction in Item 1 that the pilot is not considered employed by [the claimant] and Ryanair. In Item 3, the pilot confirms his status as self-employed/sole proprietorship, or a person made available to [the claimant] by a company with a liability under German law."

6. There was a supplementary ILOR dated 25 November 2013 from Dr Bohnen requesting urgent assistance. It updated the Home Office on the German investigation. During the period in which the offences were committed, the ILOR said, the claimant was responsible for processing the monthly work performance for approximately 1600 ostensibly self-employed pilots with Ryanair and around 300 Irish companies which had the legal form of a limited company. These companies were administered by trustees.

"According to our estimations, these companies mainly serve to conceal an employment relationship with Ryanair."

The letter set out the need for access to the claimant's accounting and billing data, A1 certificates and information on monthly remuneration paid by Ryanair to the ostensibly independent pilots. Dr Bohnen stated that he did not fear that the documents were destroyed, since they were normal business situations of the claimant. The German, and presumably the British, regulations required these documents to be stored.

7. On 14 April 2015, a lawyer in the Home Office Central Authority wrote to PC Mary O'Connor of the Economic Crime Unit of the Surrey Police directing that an application be made for a search warrant under section 13(1)(b) of the 2003 Act. The letter also said that if this conduct had occurred in England and Wales, it would constitute the indictable offence of fraud, cheating the revenue, fraudulent evasion of VAT, and false statement for VAT purposes.
8. On 21 April 2015, PC O'Connor made an application before HHJ Critchlow at the Crown Court Guildford for a warrant under section 16 of the 2003 Act and section 9(1) and Schedule 1 of PACE to search the claimant's premises. There was a 20 page application on which PC O'Connor relied, signed by her and authorised by Chief Inspector Clay. It was entitled "Application for a Search Warrant for Special Procedure Material in respect of an International Letter of Request." It was said to be an application under section 16 of the 2003 Act and under PACE.
9. The application set out the background as explained in the German documents, the material sought, the material to be relied upon (notably the ILORs), and the relevant provisions of the 2003 Act and PACE. It then worked through how PC O'Connor understood the statutory pre-conditions for the application were met in light of the German material. PC O'Connor considered obtaining a production order instead of a search warrant and noted that there was no direct evidence to say that the subjects would destroy any such material as soon as they became aware of police interest in it. Nonetheless, she concluded that a search warrant was justified.
10. There was a 12 minute hearing before HHJ Critchlow. He had the application and PC O'Connor appeared before him. He issued the search warrant. There was no recording of the hearing or of the judge's reasons. Nor is there a note by PC O'Connor or anyone else as to what was said at the hearing.
11. On 20 May 2015, the search warrant was executed with a team of German investigators and the claimant's solicitor in attendance.
12. Meanwhile, HM Revenue & Customs ("HMRC") had sent the claimant a letter dated 24 March 2015. That letter related to an "Employer Compliance Review" into the claimant by HMRC, which began in October 2011. It examined payments made by the claimant to pilots it supplied to various airlines and the PAYE and national insurance contributions ("NICs"). The letter recorded that:

"The vast majority of the correspondence thus far has been in respect of information requests made by HMRC (via schedule 36) which were appealed by [the claimant] on the grounds that they were excessive and in contravention of the Data Protection Act.

…

Details were also requested of 'Brookfield Standard captain'. This hasn't been provided."

The letter stated that the agency legislation applied. "I do not consider the pilots had any genuine right of substitution whereby they could supply and pay a substitute pilot." Thus the claimant was required to operate PAYE and NICs on the payments received by the pilots. The letter then set out HMRC's protective assessments in respect of PAYE and NICs due from the claimant in respect of the 2010/11, 2011/12 and 2012/13 years, some £47 million in total.

Legislative framework

13. Under section 16(1) of the 2003 Act, the search provisions under Part 2 of PACE are extended to cover directions under the 2003 Act from the UK Central Authority of the Home Office to obtain a search warrant, where the conduct constitutes an offence under the law of a country outside the United Kingdom and would, if it occurred in England and Wales, constitute an indictable offence: section 16(1)(a)–(b).
14. Section 9 of Part 2 of PACE provides that a constable may obtain access to excluded material or special procedure material for the purposes of a criminal investigation by making a Schedule 1 application. Paragraph 2 of that Schedule contains the first set of access conditions, inter alia, that there are reasonable grounds for believing that an indictable offence has been committed and other methods of obtaining the material have been tried without success. Paragraph 12 of Schedule 1 of PACE provides in part:

"If on an application made by a constable or a circuit judge –

(a) is satisfied—

(i) that either set of access conditions is fulfilled; and

(ii) that any of the further conditions set out in paragraph 14 below is also fulfilled [in relation to each set of premises specified in the application]

…

he may issue a warrant authorising a constable to enter and search the premises…"

Paragraph 14 then provides that the further conditions mentioned in paragraph 12(a)(ii) include that service of notice of an application for an order under paragraph 4 may seriously prejudice the investigation.

Was the test for double criminality justified?

15. Dual criminality is essential under section 16 of the 2003 Act. The conduct in the German allegations would constitute criminal offences in German law, but the issue the claimant raises is whether it would constitute the offences identified here in the UK because of their required element of dishonesty. Mr Bowers QC submitted that the German ILOR, and therefore PC O'Connor's application for the warrant, did not state that dishonesty was a component of the conduct. He submitted that the only conceivable offence that could arise domestically from the conduct described was the common law offence of cheating the revenue. That required an element of dishonesty that is not described as being necessary for the commission of the German offence. Intention might be required but that does not go to dishonesty. The heading to the German section 370, "tax evasion", was not repeated in the section itself, but in any event did not equate to dishonesty. The facts set out in the ILOR relied upon simply described the conduct or actus reus of any offence, but cast no light on the state of mind required for its commission. The judge had to be satisfied that the German offence required an element of dishonesty but there was nothing before him to indicate that.
16. Mr Bowers continued that the circumstances of the domestic tax enquiry by HMRC should have been disclosed to the judge. The HMRC and the German authorities were investigating the same issues. The fact that no allegation of criminality arose from the HMRC enquiry undermined the assertion that the domestic authorities would regard the contractual relationship as a criminal sham and any inference that might be drawn that the conduct disclosed dishonesty. Without a sham, a recategorisation of the parties to the contracts for fiscal purposes would not indicate a domestic offence involving dishonesty.
17. In my view it is not arguable that the judge did not have reasonable grounds to believe that the conduct described in the German allegations disclosed dishonesty. To my mind, allegations of dishonesty run as a thread through the German ILOR and the order of the Amtsgericht, Koblenz. The German section 370 – "Tax evasion" – is only a starting point. There is then the ILOR, which makes clear that this is not an open dispute between the German authorities and the claimant. In the earlier ILOR, the claimant is said to be a letterbox company and to have engaged in deliberate concealment, that in fact it is controlled by Ryanair and that the pilots are not truly independent contractors. The German investigation began with an anonymous complaint and the evidence from that is bolstered by the evidence from Mr Van der Zwaal, that the reality of the pilots' position is far removed from that portrayed in the formal arrangements. There are the references to pseudo self-employment and to fictions in the documents. The extracts from the German court's order quoted earlier gives added support to the only possible inference being that there is dishonesty: the position of the pilots is quite contrary to Ryanair's statements and the agreements state a fiction. There is also the allegation of concealment in the November 2013 supplementary ILOR.
18. Moreover, I do not regard it as arguable that non-disclosure of the HMRC inquiry made a difference to the judge's decision. To the contrary, the HMRC enquiry into the contractual relationships rejected the status of the pilots for tax purposes, which the claimant had advanced. This led to the £47 million protective assessment. The inquiry is continuing.
19. In summary, before the judge there were substantial grounds for believing that the conduct alleged in the German ILOR would amount to an offence under UK law in that an allegation of dishonesty can properly be inferred from the allegations made.

Was the warrant necessary rather than a production order?

20. The claimant contends that a warrant was unnecessary and a production order would have sufficed to obtain the material held under a duty of confidence because it was special procedure material as defined by section 14 of PACE. Mr Bowers pointed to the claimant's cooperation with HMRC in its inquiry and underlined what was said in the senior prosecutor's supplementary letter of 25 November 2013, that he did not fear that the documents had already been destroyed.
21. In my view this does not get off the ground. The German ILOR is replete with references to the claimant's failure to cooperate and to produce material to the authorities there. The very fact that the German prosecutor sought and obtained a search warrant from the German court, and asked the British police to execute it, suggest that there was a concern that the documents would not be provided if requested and might be hidden or destroyed. The comment of the senior prosecution in the November 2013 letter was simply that the documents should be there as ordinary business records. Even if PC O'Connor had known about the HMRC inquiry, it is difficult to see how it would have provided any assurance that the claimant would have complied with a production order. In other words, I accept Ms Wolfe's submission that PC O'Connor's analysis was reasonable and appropriate that a search warrant, rather than a production order, was necessary.

Recording of the hearing and the giving of reasons

22. Mr Bowers was rightly critical of the failure to record the hearing or at least the reasons for the judge's decision. As a matter of good practice hearings such as this must be recorded and the judge should give reasons: e.g., R (S) v. Chief Constable of the British Transport Police [2013] EWHC 2189 (Admin), [46]. Omissions in this regard do not render, however, the warrant unlawful: R (Glenn & Co. (Essex Ltd.)) v. Revenue and Customs Commissioners [2011] EWHC 2998 (Admin); R (Cronin) v. Sheffield Justices [2002] EWHC 2568 (Admin); [2003] 1. W.L.R. 752. In this case there was a detailed written application submitted to the judge. At the hearing, the judge had the application and PC O'Connor was there to assist. Since it was an open and shut case the failures under this head are not fatal.

Conclusion

23. I would refuse this renewed application for judicial review.

Lord Justice Beatson:

24. I agree.