United Kingdom House of Lords Decisions

Institute of Chartered Accountants in England and Wales v. Commissioners of Customs and Excise [1999] UKHL 19; [1999] 2 All ER 449; [1999] 1 WLR 701 (25th March, 1999)

LORD SLYNN OF HADLEY

My Lords,

Two questions have been raised on this appeal. The first is whether section 4 of the Value Added Tax Act 1994 and article 4 of the Sixth Council Directive 77/3881 E.E.C. of 17 May 1977 ("the Directive") make chargeable to Value Added Tax certain activities carried out by the Institute of Chartered Accountants in England and Wales with the consequence that the Institute can claim repayment or set-off of Input Tax paid on goods and services supplied to the Institute, the latter being the real purpose of these proceedings. If the activities are chargeable to tax, then the second question arises as to whether the Institute is a body governed by public law and whether it engages in these activities as a public authority, in which case the Institute is not considered a taxable person in respect of these activities. If they are not so chargeable to tax (as the Commissioners, the V.A.T. Tribunal, Tuckey, J. and the Court of Appeal held) then the second question does not arise for decision.

By the Directive, "the supply of goods or services effected for consideration . . . by a taxable person acting as such" is subject to V.A.T. (article 2) and by article 4, "'taxable person' shall mean any person who independently carried out in any place any economic activity specified in paragraph (2), whatever the purpose or results of that activity."

 "(2) The economic activities referred to in paragraph (1) shall comprise all activities of producers, traders and persons supplying services, including . . . activities of the professions.

 "(5) State, regional and local government authorities and other bodies governed by public law shall not be considered taxable persons in respect of the activities or transactions in which they engage as public authorities, even where they collect dues, fees, contributions or payments in connection with these activities or transactions."

By the Act of 1994, section 4: "V.A.T. 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" and a taxable person is one who "is, or is required to be, registered under this Act" (section 3). "'Supply'. . . includes all forms of supply, but not anything done otherwise than for a consideration;" and "anything which is not a supply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services" (section 5).

By section 94 of the Act:-

 "(1) In this Act 'business' includes any trade, profession or vocation.

 (2) Without prejudice to the generality of anything else in this Act, the following are deemed to be the carrying on of a business--

  (a) the provision by a club, association or organisation (for a subscription or other consideration) of the facilities or advantages available to its members;".

There is no issue that for some purposes the Institute is a person registered for V.A.T. and is a taxable person, though membership subscriptions are exempt from V.A.T. under Schedule 9 Group 9 of the Act of 1994. The question is whether in carrying out functions under three statutes, the Institute is such a person, though it is common ground that the mere fact that it is carrying out functions pursuant to statutory powers does not mean that the Institute cannot be such a person.

The three functions arise in this way.

The Financial Services Act 1986 provides that a person may not carry on "investment business" unless authorised pursuant to the Act. One way of becoming authorised is through "a recognised professional body" recognised by the Securities Investment Board as delegate of the Secretary of State (Financial Services Act 1986 (Delegation) Order 1987 S.I. 1987/942). To be recognised, a body must regulate the practice of a profession (Schedule 3, paragraph 2) and be able effectively to monitor the person certified by it under the Act and to maintain high standards of integrity. The Institute's "Capital Investment Business Regulations" were approved by the Board so that the Institute was recognised as a body able to issue Certificates of Authorisation to its members so that they could carry on investment business. Under those Regulations an "Authorisation Committee" was established which, through its delegate, Joint Monitory Unit Limited, issued or refused, renewed or revoked authorisations to carry on such business, and which monitored the activities of authorised firms. Fees, fixed in part by reference to the type of authorisation granted and to the size of the firm, were payable by authorised firms to meet the costs of implementing the regulation. The Guidance Notes attached to the Regulations provided in note 115, "The purpose of the Act is to protect the investing public. The Institute has accepted its responsibilities as an R.P.B. in that light."

Under the Companies Act 1989, to be eligible for appointment as a company auditor, a person must be so eligible under the rules of a recognised supervisory body of which he is a member. Again, the body must be recognised by the Secretary of State and satisfy the necessary criteria. The object of these provisions is to see that only fit and proper persons are so appointed and that their activities are monitored. The Institute was recognised as a supervisory body in 1991 and it appointed a Registration Committee with the task of receiving applications for registration and making enquiries about the activities of members either itself or through the J.M.U. as its agent. The costs of implementing the Regulations are recovered through fees.

Under the Insolvency Act 1986, the Institute was accepted as a recognised professional body and regulations were drawn up which required the Practice Regulation Directorate of the Institute to appoint a Licensing Committee with the power to grant or refuse, review or terminate licences to practise as an insolvency practitioner and to investigate the activities of members. Again, monitoring activities can be delegated as they were by the Institute to the Joint Insolvency Monitoring Unit Limited.

Although in 1993, there was a surplus of fees over expenditure in respect of each of the licensing activities, the fees charged, the Tribunal was told, are determined so as to enable the Institute to break even, taking one year with another.

It is thus clear that in respect of these three activities, the Institute's regulatory functions are essentially for the protection of members of the public.

There is a difference in the wording between section 4 of the Act and articles 2 and 4 of the Directive. Thus the Act refers to "taxable supply made by a taxable person in the course or furtherance of any business carried on by him". The Directive refers to the supply of services, "effected for a consideration by a taxable person" and taxable person means a person who independently carried out any economic activity, including "the activities of the professions." The Act must so far as possible be construed so as to give effect to the Directive (Marleasing S.A. v. La Comercial Internacional de Alimentacion S.A. (Case C-106/89) [1990] ECR I-4135). It does not seem to me that there is any difficulty here in doing that and one would expect the same result to follow from the application of either approach.

If read literally, it can be argued as Mr. Andrew Thornhill, Q.C. has done, that in granting these licences for a fee, the Institute is supplying services in the course of a business, or is supplying services for consideration in the carrying on of an economic activity. But so far as the Directive is concerned, the European Court of Justice has made it clear that it is not enough merely to point to the fact that there is 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" (Polysar Investments Netherlands BV v. Inspecteur der Invoerrechten en Accijnzen, Arnhem (Case C-60/90), [1993] STC 222).

The European Court has had to deal with cases on both sides of the line. Thus, in Commission of the European Communities v. Kingdom of the Netherlands (Case-235/85) [1987] ECR 1471, the question arose whether notaries and bailiffs supplying services to third parties in return for fees which they received for their own account, were taxable persons within the meaning of article 4 of the Directive. It was held that they were, even if appointed by the State and carrying out functions regulated by the State. The court held that the "scope of the term 'economic activities' is very wide, in as much as it covers all the services provided by the liberal professions and that the term is objective in character, in the sense that the activity is considered per se and without regard to its purpose or result" (para. 8). The court said, at p. 1487 (para. 9):

 "In view of the wide definition of the term 'economic activities,' encompassing all the activities of the professions without an reservation in respect of professions regulated by statute, it must be concluded that, in so far as notaries and bailiffs in the Netherlands provide services to private individuals on a permanent basis and in return for remuneration, they carry out an economic activity within the meaning of the Sixth Directive."

Similarly, in Ayuntamiento de Sevilla v. Recaudadoras de las Zonas Primera y Segunda (Case C-202/90), [1993] S.T.C. 659 the question was whether the activities of tax collectors appointed by local authorities who carried out their activities under the control of the Treasury of the authorities who appointed them constituted professional services carried out independently within the meaning of article 4(1) and (4) of the Directive. They were paid by a percentage of the sums received and were not employees, but provided their own staff and offices. Although the real question turned on article 4(5), it was not suggested, it seems, that they were not carrying on an economic activity, even though it was done on behalf of a public authority. It appears that in both these cases, the persons concerned were carrying out activities for their own account in the way that professional men ordinarily do, even if the activities were carried out on behalf of the State.

On the other hand, in Diego Cali & Figli Srl v. Servizi Ecoloici Porto di Genova SpA (SEPG) (Case C-343/95) [1997] ECR I-1547, the European Court held that anti-pollution surveillance entrusted by the Port Authority of Genoa to S.E.P.G. was an essential function of the State for the protection of the environment and not an economic activity subject to the Community rules on competition. Similarly, in SAT Fluggesellschaft mbh v. European Organisation for the Safety of Air Navigation (Eurocontrol) (Case C-364/92), [1994] ECR I-43 powers were conferred on Eurocontrol by public authority for the exercise of navigation control. The charges collected were the consideration for the obligatory and exclusive use of air navigation control facilities and services. The activities were typically, the court found, the activities of a public authority and not of an economic nature which fell within the competition provisions of the Treaty.

In a different area of activity, the court held in the Polysar case [1993] STC 222 (supra) that the mere holding of shares in other companies from which a company received dividends and from which it paid dividends to its own parent company, did not make the Polysar case a taxable person for the purposes of article 4 of the Directive. It did not follow that the mere acquisition and holding of shares was to be regarded as an "economic activity," nor did it constitute the exploitation of property. A similar result was reached in Wellcome Trust Limited v. Custom and Excise Commissioners (Case C-155/94), [1996] STC 945, where the court held that the purchase and sale of shares as an investment (which did not involve a commercial share dealing activity and was not the acquisition of shares so as to secure involvement in the management of companies) was not an economic activity. As the Advocate-General said in deciding whether an activity is an economic activity, "it is the inherent nature of the activity itself that is the vital consideration."

On the other hand, in the Apple & Pear Development Council v. Custom and Excise Commissioners (Case 102/86), [1986] S.T.C. 192, growers paid an annual levy to the Council to enable it to carry out its functions of promoting the marketing and production of English apples and pears. Although a question was referred to the European Court as to whether there was a "supply of services . . . effected for a consideration," Lord Brightman said, at p. 197:

 "there was not, and could scarcely have been, any challenge to the finding of the Tribunal that the Council carried on a business within the ordinary meaning of that expression."

For the purposes of the Directive, it is thus not sufficient that what is done can be described as an activity of the professions for the purposes of article 4(2), nor that it was a supply of services for consideration for the purposes of aticle 2(1). It must still be an economic activity.

On the basis of cases like Eurocontrol [1994] ECR I-43 and as a matter of ordinary language, I do not consider that what is done here by the Institute is such an economic activity. The Institute is carrying out on behalf of the State a regulatory function in each of these three financial areas to ensure that only fit and proper persons are licensed or authorised to carry out the various activities and to monitor what they do. This is essentially a function of the State for the protection of the actual or potential investor, trader and shareholder. It is not in any real sense a trading or commercial activity which might justify it being described as 'economic' and the fact that fees are charged for the granting of the licences (to be assessed overall on a break-even basis) does not convert it into one.

In regard to "business" for the purposes of the Act, Ralph Gibson, J. held in Customs and Excise Commissioners v. Lord Fisher [1981] S.T.C. 238 on earlier authority "that 'business' is or may be in particular contexts a word of very wide meaning," but that "the ordinary meaning of the word 'business' in the context of this Act excludes, in my judgment, any activity which is no more than an activity for pleasure and social enjoyment," though the fact that the pursuit of profit or earnings was not the motive did not prevent an activity from being a business if in other respects it plainly was. He referred, at p. 245 to six indicia listed by counsel for the Commissioners as the test as to whether an activity was a business--was it (a) a "serious undertaking earnestly pursued"; (b) pursued with reasonable continuity; (c) substantial in amount; (d) conducted regularly on sound and recognised business principles; (e) predominantly concerned with the making of taxable supplies to consumers for a consideration; (f) such as consisted of taxable supplies of a kind commonly made by those who seek to make profit from them.

The Tribunal in this case accepted that in deciding whether an activity was a business, the first four tests referred to by Ralph Gibson, J. were satisfied and discussion turned first on whether there were here supplies "commonly made by those who seek to make profit from them" and, secondly, whether "the relevant activity is predominantly concerned with the making of taxable supplies for a consideration." The Tribunal held that neither was satisfied and that for similar reasons, the activity in question here was "outside the economic circuit with which the V.A.T. charge operates." The Lord Fisher case is a long way from the present, but it does indicate that business, too, in its ordinary sense and for the purposes of the Act needs to be given an "economic" content.

Although differences between them may arise, it seems to me that the appellants were right in their case to accept that "The expression 'business', it is accepted, represents 'economic activities'." It is not necessarily sufficient (though it may often be sufficient in different contexts) that money is paid and a benefit obtained. Performing on behalf of the State this licensing function is not the carrying on of a business.

In relation to the Directive, the Tribunal said:

 "A regulatory activity carried out under a statutory power for the purpose of protecting the public by supervising and maintaining the standards of practitioners in, for example, the Financial Services field fall on the other side of the line from economic activities."

In the present case, I agree that that is entirely right and the same goes for "business" in the context of these three Statutes.

On this first issue, the answer is sufficiently clear that I do not consider that your Lordships are required to refer the matter to the European Court of Justice and in the circumstances, it is not necessary to deal with the argument based on article 4(5) of the Directive. I would accordingly dismiss the appeal.

LORD LLOYD OF BERWICK

My Lords,

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Slynn of Hadley. For the reasons he gives I, too, would dismiss the appeal.

LORD HOFFMANN

My Lords,

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Slynn of Hadley. For the reasons he gives I, too, would dismiss the appeal.

LORD HOPE OF CRAIGHEAD

My Lords,

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Slynn of Hadley. I agree with it, and for the reasons which he has given I too would dismiss the appeal.

LORD HUTTON

My Lords,

I have had the advantage of reading in draft the speech prepared by my noble and learned friend, Lord Slynn of Hadley. I agree with it, and for the reason he gives I too would dismiss the appeal.