A Jewish man convicted of making millions running a string of brothels in Manchester has had his proceeds-of-crime court confiscation order reduced by £4.2 million after winning an appeal that could affect future prosecutions of people operating in the sex industry.

Three judges at the Court of Appeal in London upheld a claim that a Manchester judge had wrongly ordered the confiscation of £4.2 million of brothel earnings made by Ian Barnett, 60, from Prestwich. Mr Barnett had already forfeited £21,000 in the first of his two convictions for operating brothels, preventing a judge from confiscating immoral earnings from the previous six years, under a legal technicality. He is now liable for £873,010 of immoral gains made after 2005.

The court heard that Mr Barnett's prostitution businesses, "whilst not condoned by the local police, did receive a measure of tacit approval over a period of time." Mr Barnett claimed that Greater Manchester Police gave a kind of legal permission to run his brothels in return for co-operation and assurances that his businesses did not involve drugs or under-age girls.

It followed Home Office guidance issued at the time that advised police forces to focus on "trying to ensure that prostitution took 'the least unacceptable form'", the judges notes.

The appeal ruling last Wednesday will not materially affect how much Mr Barnett will pay, after the court upheld the Manchester court's actual fine of just £4,000 of the £5 million, because financial investigators found Mr Barnett has subsequently become impoverished and is living on benefits.

However, the judges said the case "could not exclude the possibility that it may become relevant in future proceedings." Mr Barnett, who was given a three-year prison sentence in 2008 and has admitted to running brothels, is involved in a number of legal appeals aimed at clearing the names of brothel owners who claim they were misled by the police and the Home Office into believing they would not be prosecuted for their prostitution activities.