LAW REPORT: No VAT charge on licensing accountants

LAW REPORT: 22 May 1997; Institute of Chartered Accountants in England & Wales v HM Customs & Excise

Institute of Chartered Accountants in England & Wales v HM Customs & Excise; Court of Appeal (Lord Justice Beldam, Lord Justice Thorpe and Sir Roger Parker) 15 May 1997

The Institute of Chartered Accountants was not entitled to charge Value Added Tax on the charges it made for granting licences and certificates to practitioners in accountancy who carried on investment business, practice as auditors, or practice in insolvency.

The Court of Appeal dismissed the appeal of the Institute of Chartered Accountants against the decision of Mr Justice Tuckey.

Andrew Thornhill QC and Rupert Baldry (Denton Hall, Milton Keynes) for the appellant; Kenneth Parker QC (Solicitor, Customs & Excise) for the respondent.

Lord Justice Beldam said that in granting licences and certificates to accountants who carried on investment business or practised in auditing or insolvency, the institute was acting as a recognised professional body in pursuance of Acts of Parliament passed to protect the public against the risk of loss due to fraud, incompetence, misconduct and breach of trust in financial affairs.

The institute paid VAT on supplies used in performing those services. The Commissioners of Customs & Excise had ruled that, although the institute supplied services in return for the fees charged to its members for authorising them to carry on the three types of business, such services were not provided in the course or furtherance of a business and consequently the institute could not charge VAT for the services.

The effect of the ruling was that the institute was unable to recover, by way of set-off, the VAT which it had paid on the supplies used in providing the service, against VAT which it would have charged its members had VAT been payable.

The institute had appealed to the VAT tribunal, which had concluded that it had not established that its practice regulation activities amounted to the carrying on of business for the purposes of section 4(1) of the Value Added Tax Act 1994, which it would have had to establish under domestic law.

It had then gone on to consider whether under Articles 4.1 and 4.2 of the Sixth EEC Directive (77/388/EEC) the supply of the regulatory licences was an economic activity. Whilst accepting that the scope of the words "economic activity" was very wide, the tribunal did not consider that it encompassed regulatory activities of the sort carried on by the institute.

The purpose of the Sixth Council Directive was the harmonisation of the laws of the member states relating to turnover taxes, with the aim of introducing a common system of Value Added Tax with a uniform basis of assessment. In the United Kingdom the provisions relating to Value Added Tax were contained in the Value Added Tax Act 1994.

It was plain that the words of the Act were intended to encompass the activities referred to in the Directive. Those activities were stated to be the activities of the professions, and not all transactions which involved the performance of services supplied in pursuance of the law would necessarily amount to a taxable supply of services.

From the authorities it could be concluded that the concept of "an economic activity" was one which typically was performed for a consideration, and was connected with economic life in some way or another. It was not, however, an essential characteristic that it should be carried on with a view to profit or for commercial reasons, but it must be an activity which was analogous to activities so carried on.

An activity which consisted in the performance of a public service, to which the idea of commercial exploitation with a view to profit or gain was alien, was not of an economic nature particularly where the activity was one typically of a public authority.

Applying those criteria to the activities of the institute, they were not activities of an economic nature. They were activities which Parliament had decreed should be carried out for the protection of the public.

The fact that the institute generated revenue from the issue of licences, certificates or maintenance of the register to cover overheads did not of itself mean that it was an economic activity. Although it was connected with the activity of the profession of accountancy, the activity of the institute did not consist in the supply of such services for consideration, but in ensuring that those in the profession who did provide such services did so in accordance with the law's requirements.

Accordingly, the judge's decision would be upheld.

Kate O'Hanlon, Barrister