Institute of Chartered Accountants in England and Wales v. Commissioners of Customs and Excise

The House of Lords considered whether the grant and supervision of licences and authorisations by the Institute of Chartered Accountants in England and Wales amounted to supplies of services chargeable to Value Added Tax under section 4 of the Value Added Tax Act 1994 and article 4 of the Sixth Council Directive 77/388/E.E.C. The court applied the Community law test of whether an activity is of an "economic" character and related that to the statutory concept of "business" in the Act (including section 94 and the definitions in sections 3 and 5).

The Lords held that the Institute's functions under the Financial Services Act 1986, the Companies Act 1989 and the Insolvency Act 1986 were regulatory functions carried out on behalf of the State for the protection of investors, companies and creditors and therefore were not economic activities of the kind that attract VAT. Because those activities were not taxable supplies, it was unnecessary to decide whether the Institute was a body governed by public law for the purposes of article 4(5) of the Directive. The appeal was dismissed.

Background and parties: The Institute (appellant) sought repayment or set-off of input tax paid on goods and services supplied to it. The Commissioners of Customs and Excise (respondents) maintained that the Institute's regulatory activities were not chargeable to VAT. The case reached the House of Lords after findings at earlier stages by the V.A.T. Tribunal, Tuckey J. and the Court of Appeal that the activities were not taxable.

Nature of the claim: The Institute sought a declaration and recovery in respect of input tax, arguing that fees charged for licences and authorisations were taxable supplies by a taxable person under section 4 of the Value Added Tax Act 1994 and article 2 read with article 4 of the Sixth Directive.

Issues framed: (i) whether the relevant activities were supplies chargeable to VAT under section 4 of the Act and article 4 of the Directive (i.e. whether they were "economic activities" or "business"); and (ii) if so, whether the Institute was excluded as a taxable person because it was a body governed by public law engaging in activities as a public authority (article 4(5)).

Court's reasoning: The court analysed the statutory provisions (sections 3, 4, 5 and 94 and Schedule 9 Group 9 of the 1994 Act) and the Directive (articles 2 and 4). It reviewed Community case law on the scope of "economic activity", distinguishing cases where professional services provided for remuneration were economic and cases where functions entrusted by public authorities were not (for example, Polysar, Eurocontrol, Diego Cali and Wellcome Trust). The Lords found that the Institute's licensing and supervisory activities were regulatory functions performed on behalf of the State to protect members of the public, carried out with monitoring powers (sometimes by delegated agencies) and financed by fees set to break even. Those features meant the activities lacked the necessary economic character or commercial content to be taxable supplies or "business" for VAT purposes. Because the activities were not taxable supplies, the court did not decide the separate question under article 4(5) of the Directive. The appeal was dismissed.

Wider context: The court noted the line of authorities drawing the distinction between professional, profit-seeking activities and essential public-authority functions, and treated the remedy sought (recovery/set-off of input tax) as contingent on the characterisation of the activities as economic or not.

Appeal dismissed. The regulatory licensing and supervisory activities carried out by the Institute under the Financial Services Act 1986, the Companies Act 1989 and the Insolvency Act 1986 were not "economic activities" or "business" for the purposes of article 4 of the Sixth Directive and section 4 of the Value Added Tax Act 1994. Those activities were regulatory functions performed on behalf of the State for protection of the public and therefore fell outside the VAT charge; consequently it was unnecessary to decide the article 4(5) point.