Institute of Chartered Accountants in England and Wales v Customs and Excise Comrs

An activity is subject to value added tax only if it has an economic character. The supply of services for payment, even by a professional body, does not by itself satisfy that requirement.

A professional body does not conduct an economic activity or business when it performs, on behalf of the state, a statutory licensing and monitoring function directed to protecting the public. Charging fees calculated broadly to recover the cost of regulation does not convert that public regulatory function into a trading or commercial activity. The expressions “economic activity” in the Sixth Council Directive 77/3881 E.E.C. of 17 May 1977 and “business” in the Value Added Tax Act 1994 bear corresponding economic content in this context.

The Institute regulated its members’ participation in investment business, company auditing and insolvency practice under three statutory regimes. It granted or refused authorisations and licences, monitored practitioners and charged fees intended to recover the regulatory costs over time.

The Commissioners decided that these activities were outside the scope of value added tax. The VAT Tribunal, Tuckey J and the Court of Appeal agreed. The Institute appealed because taxable treatment would permit the recovery or set-off of related input tax.

The principal issue was whether the activities amounted to “economic activity” under article 4 of the Sixth Council Directive 77/3881 E.E.C. of 17 May 1977 or “business” under section 4 of the Value Added Tax Act 1994. A secondary issue concerning the public-authority exclusion in article 4(5) arose only if the activities were otherwise economic.

1. Appeal dismissed unanimously. Lord Slynn of Hadley delivered the leading speech. Lord Lloyd of Berwick, Lord Hoffmann, Lord Hope of Craighead and Lord Hutton agreed with his reasoning and disposition.

2. Per Lord Slynn, the existence of services, payment and some economic connection does not establish an economic activity under articles 2 and 4 of the Sixth Council Directive 77/3881 E.E.C. of 17 May 1977. The inherent character of the activity remains decisive. The broad references to professional activities and supplies for consideration do not remove that requirement.

3. The Institute’s three activities were essentially state regulatory functions undertaken to protect investors, traders, shareholders and the wider public. They ensured that only fit and proper persons were authorised or licensed and that their subsequent conduct was monitored. These functions were not trading or commercial activities in any real sense.

4. The receipt of fees did not change that conclusion. The fees met the costs of regulation and were intended to produce neither profit nor loss over time. A service and corresponding payment may often indicate economic activity, but they are not conclusive where the service is inherently public and regulatory.

5. The expression “business” in section 4 of the Value Added Tax Act 1994 likewise requires economic content. The domestic legislation could and should be construed consistently with the Directive. The accepted indicia of business supported the conclusion because the activities were neither supplies commonly made for profit nor predominantly the making of taxable supplies for consideration.

6. The activities therefore fell outside the economic circuit to which value added tax applies. They were neither economic activities under the Directive nor business under the Act. The answer was sufficiently clear to make a reference to the European Court of Justice unnecessary. Article 4(5), concerning bodies governed by public law acting as public authorities, consequently did not require determination.

1. House of Lords: Dismissed the Institute’s appeal unanimously and upheld the conclusion that the three regulatory activities were outside the scope of value added tax.

2. Court of Appeal: Upheld the conclusion that the activities were not chargeable to value added tax. No citation is stated in the judgment.

3. High Court: Tuckey J upheld the VAT Tribunal’s decision. No citation is stated in the judgment.

4. VAT Tribunal: Held that the regulatory activities were outside the economic circuit to which value added tax applied and did not constitute business.