Wednesday Law Report: Regulatory functions not chargeable

14 April 1999 Institute of Chartered Accountants in England and Wales v Commissioners of Customs and Excise House of Lords (Lord Slynn of Hadley, Lord Lloyd of Berwick, Lord Hoffmann, Lord Hope of Craighead, Lord Hutton) 25 March 1999

A PROFESSIONAL body carrying out, under statutory authority, a regulatory function which was essentially for the protection of the public, was not carrying on an economic activity which was chargeable to value added tax within the terms of section 4 of the Value Added Tax Act 1994 and article 4 of the Sixth Council Directive 77/3881 (EEC) of 17 May 1977, notwithstanding that it received fees for that activity.

The House of Lords dismissed the appeal of the Institute of Chartered Accountants in England and Wales against the decision of the Court of Appeal that certain of its activities were not chargeable to VAT.

The institute claimed repayment or set-off of input tax paid on goods and services supplied to it in respect of certain of its functions for which fees were payable. Those functions arose:

i) under the Financial Services Act 1986 and the Financial Services Act 1986 (Delegation) Order 1987 (SI 1987/942), pursuant to which the institute was recognised as a body able to issue certificates of authorisation to its members so that they could carry on investment business;

ii) under the Companies Act 1989, pursuant to which the institute was recognised as a supervisory body in respect of company auditors; and

iii) under the Insolvency Act 1986, pursuant to which the institute was accepted as a recognised professional body with the power to grant or refuse, review or terminate licences to practise as an insolvency practitioner and to investigate the activities of members.

Section 4 of the Value Added Tax Act 1994 provided: "VAT shall be charged on any supply of goods or services made in the United Kingdom where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him."

By article 2 of the Sixth Council Directive 77/3881 (EEC) of 17 May 1977 "the supply of goods or services effected for consideration . . . by a taxable person acting as such" was subject to VAT, and by article 4(1) "taxable person" meant "any person who independently carries out in any place an economic activity specified in paragraph (2)".

Article 4(2) provided: "The economic activities referred to in paragraph (1) shall comprise all activities of producers, traders and persons supplying services, including . . . activ-ities of the professions."

Andrew Thornhill QC and Rupert Baldry QC (Denton Hall) for the Institute; Kenneth Parker QC and Melanie Hall (Solicitor for HM Customs and Excise) for the Commissioners.

Lord Slynn said that there was a difference in the wording of the 1994 Act, which referred to a "taxable supply made by a taxable person in the course or furtherance of any business carried on by him", and that of the Directive, which referred to the supply of services "effected for a consideration by a taxable person", a "taxable person" being a person who carried out any economic activity including "the activities of the professions".

The Act had, so far as possible, to be construed so as to give effect to the Directive, and so far as the Directive was concerned, the European Court of Justice had made it clear that it was not enough merely to point to the fact that there was a supply of services in return for a money payment and some loose economic connection, but that the activities must be of an "economic character".

In the present case, the institute was carrying out on behalf of the State a regulatory function in each of the three financial areas in question to ensure that only fit and proper persons were licensed or authorised to carry out the various activities, and to monitor what they did.

That was essentially a function of the State for the protection of the actual or potential investor, trader and shareholder. It was not in any real sense a trading or commercial activity which might justify it being described as "economic", and the fact that fees were charged for the granting of the licences did not convert it into one.