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15-07-2011

Kenneth Clarke, the British justice minister, has provoked a furious reaction from recovery and fraud professionals in the UK over moves to clamp down on no-win no-fee arrangements in the justice system.

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R3, the UK’s insolvency trade association, has launched a campaign to overturn the move, which it says would be a huge setback for its members. R3 president Frances Coulson was scathing about Clarke’s vision, dubbing it “a fraudster’s charter.”

She added: “It is essential that insolvency is exempt from these proposals so that businesses and HMRC are not left out of pocket and wrongdoing is not seen to be excused.”

The R3 head also warned that in the case of carousel fraud, a large-scale value added tax (VAT) evasion fraud. “Every penny left in the pocket of director in a carousel fraud case is likely to fund another one.”

Carousel fraud has a technical name, Missing Trader Intra-Community fraud, It occurs when VAT on goods such as mobile phones is recovered through fictitious re-sales outside the UK. Carousel fraud is a big and growing problem, perpetrated by organized criminal gangs, and costs HM revenue and Customs up to UK £2.5 billion each year.

The British taxman agrees with R3’s calls to exempt insolvency and fraud professionals from the new proposals and discussions are underway, according to an HMRC spokesperson.

Clarke had proposed reductions to the current scheme as a means to force out ‘ambulance-chaser’ style lawyers in personal injury cases to defamation, where defendants’ fear to losing and incurring extravagant fees can often lead to a prompt out of court settlement. Some observers claim the Government’s move is motivated by a strong self-interest. Through the NHS, local authorities and the like, the Government pays out billions of pounds a year in compensation claims.

But the present blanket reform would also see insolvency practitioners and lawyers acting in fraud cases have their options in such cases severely curtailed.

Coulson says it appears that the Ministry of Justice failed to undertake any form of impact survey to assess the consequences.

At present, insolvency practitioners often pursue claims against company directors if they believe the directors’ wealth includes assets illegally removed from a business that has gone bust.

Recoveries in these scenarios can amount to many millions of pounds, much of which can go to pay off tax bills. In just 23 cases handled by its members last year, R3 said that recoveries were UK £7.6 million. In 2010, figures show that insolvency firms failed 7,030 cases where they believed directors had acted dishonestly or contributed directly to a firm’s parlour financial state.

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