How to Challenge HMRC Account Freezing Orders

HM Revenue and Customs (HMRC) and other law enforcement agencies have increased the use of Account Freezing Orders (AFOs) and Forfeiture Orders (FOs) to tackle suspected criminal behaviour such as money laundering.

These and other extended investigatory powers were introduced into the Proceeds of Crime Act 2002 (POCA) by the Criminal Finances Act 2017. We have noted HMRC increasingly use this power and seek AFOs usually without notice by applying to a Magistrates Court (where the initial application is usually heard by a lay bench). Our legal team have successfully sought such orders be set aside.

If you or your company are subject to an Account Freezing Order, speak to our solicitors and barristers as soon as possible as you may have grounds to seek it be set aside.

What is an Account Freezing Order (AFO)?

An Account Freezing Order (AFO), also known as an Account Forfeiture Order or Forfeiture Order, is a court order that allows law enforcement agencies, including HMRC, to freeze funds in bank accounts suspected of being associated with criminal activities. HMRC commonly use AFOs where they suspect tax may be at risk or there has been tax evasion or fraud.

An AFO is part of the broader framework of the Proceeds of Crime Act 2002 (POCA) and the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017.

How Does HMRC Obtain an Account Freezing Order?

HMRC can apply to a Magistrates’ Court for an AFO without providing any notice of the application to the account holder. The account holder will be notified later and given a date to attend court to make representations. HMRC must satisfy the Magistrates’ Court that they have “reasonable grounds for suspecting” that the money in the account meets one of the following criteria:

• It is recoverable property, meaning it was obtained through unlawful conduct.
• It is intended by any person for use in unlawful conduct.

This application process often happens without notice to the account holder, who usually only discovers the AFO when they cannot access their accounts or receive court papers.

The account must be with a bank or building society that can hold deposits, and the minimum amount in the account must be £1,000.

What is the Purpose of an Account Freezing Order?

An AFO is designed to secure tax revenue that HMRC considers to be at risk of going unpaid whilst they investigate suspected tax fraud. It prevents the account holder from accessing or withdrawing the funds during this period.

How Long Can a Bank Account Be Frozen?

An initial AFO can freeze a bank account for up to two years. Within this period, the AFO must either be discharged and the funds returned to the account holder, or the law enforcement agency must apply for forfeiture of the money.

Effects of an Account Freezing Order

The effects of an AFO include:

• The account holder is prohibited from accessing or withdrawing funds from the frozen account.
• The freezing period typically lasts for 12 months, although it can last for up to 2 years in total.
• AFOs are part of civil proceedings and do not constitute criminal charges.
• Account holders are typically notified by HMRC and have the opportunity to challenge the order in court.

What are the Grounds for Obtaining an AFO?

HMRC only needs to demonstrate “reasonable grounds for suspecting” that the money is either recoverable property or intended for use in unlawful conduct.

Can You Challenge an Account Freezing Order?

Yes, the account holder can challenge an AFO. They can:

• Make representations to the court against the granting or extension of an AFO.
• Go to court to oppose any subsequent application for forfeiture of the money.
• Negotiate directly with HMRC to agree to a variation of the AFO.

What Happens During an AFO Investigation?

During the AFO investigation period, HMRC will investigate the source of the funds and whether they are linked to criminal activities. HMRC may:

• Gather evidence from banks, financial institutions, and other sources.
• Interview the account holder and other relevant individuals.
• Analyse financial records and transactions.

Forfeiture Orders

If HMRC believe that the frozen funds are recoverable property or are intended for use in unlawful conduct, they can apply to the Magistrates’ Court for a Forfeiture Order. The court will then decide, on a balance of probabilities, whether to grant the Forfeiture Order.

Effects of a Forfeiture Order

If a Forfeiture Order is granted:

• The funds may be transferred to a nominated account.
• The AFO ceases to have effect, unless there is an application to continue pending an appeal16.
• The account holder can appeal to the Crown Court within thirty days.

If a Forfeiture Order is not granted or an AFO is discharged:

• The owner of the account may apply for financial compensation.

Case Study 1: Mileage Reclaim Ltd v HMRC – AFO successfully set aside

The case of R (Mileage Reclaim Ltd) v North Somerset Magistrates’ Court, HMRC EWHC 1531 (Admin) illustrates the potentially severe consequences of AFOs on businesses, even when granted on questionable grounds.

Mileage Reclaim Ltd, trading as Taxbuddi, had two of its bank accounts frozen by an AFO obtained by HMRC. The order, granted without notice, froze the company’s working capital and left them unable to pay their 89 employees. HMRC alleged that the funds in the frozen accounts were proceeds of fraud, specifically misrepresented tax rebates for expenses incurred by payroll employees. However, the evidence HMRC presented in its application was minimal and the Magistrates’ Court did not scrutinise the merits of the application or consider its potential business impact, granting the AFO in a five-minute hearing.

Taxbuddi applied to set aside the AFO, disputing HMRC’s claims and pointing out that HMRC’s interpretation of the relevant tax law was incorrect. Although HMRC admitted their mistake four days later, Taxbuddi’s application to set aside the AFO was delayed for almost four months. This delay had a devastating effect on the business.

While Taxbuddi’s subsequent application for judicial review of the delays was unsuccessful, the High Court acknowledged that “extraordinary failings” had occurred in both HMRC’s application and the Magistrates’ Court’s handling of the matter. This case demonstrates the significant disruption and financial hardship that AFOs can cause businesses, even when there are serious flaws in HMRC’s application.

Case Study 2: Successful Opposition to HMRC’s AFO Application

The case of FI, an alcohol wholesaler, demonstrates that it is possible to successfully oppose an AFO application by HMRC.

HMRC alleged that FI was involved in alcohol diversion fraud, claiming that the flow of over £8 million through its accounts was suspicious and indicative of money laundering and “layering”. However, FI’s legal team effectively challenged HMRC’s application by assembling comprehensive documentation, including due diligence records previously shared with HMRC. During the hearing, FI’s legal team cross-examined HMRC’s financial investigator, revealing significant gaps in HMRC’s investigation. For example, HMRC had failed to verify the relevant companies through official registers. FI’s operator gave evidence about his extensive compliance efforts, further weakening HMRC’s case.

The Magistrates’ Court dismissed HMRC’s application, finding no reasonable grounds to suspect that the funds in FI’s account were proceeds of crime. Additionally, the court ordered HMRC to pay FI’s costs, noting that HMRC’s poor investigation should have prevented the case from going to court. This case shows that HMRC’s AFO applications are not always properly thought out or supported by sufficient evidence.

Expert Account Freezing Order Lawyers

LEXLAW has a team of expert solicitors specialising in HMRC account freezing orders. With extensive experience in this field, we understand the significant challenges that AFOs can pose for individuals and businesses. We are dedicated to providing robust and strategic legal advice to protect your interests.

Contact us today for a consultation to discuss your case. We will carefully analyse your situation, guide you through the complexities of the legal process, and develop a tailored strategy to achieve the best possible outcome. Do not allow an AFO to derail your finances or business operations. Instruct us today and let our expertise work for you.