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

JurisdictionEngland & Wales
JudgeLORD JUSTICE BELDAM,LORD JUSTICE THORPE,SIR ROGER PARKER
Judgment Date15 May 1997
Judgment citation (vLex)[1997] EWCA Civ J0515-16
Docket NumberQBCOF 96/0309
CourtCourt of Appeal (Civil Division)
Date15 May 1997

[1997] EWCA Civ J0515-16

IN THE SUPREME COURT OF JUDICATURE

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

CROWN OFFICE

QUEEN'S BENCH DIVISION

(MR JUSTICE TUCKEY)

Royal Courts of Justice

Strand

London W2A 2LL

Before

Lord Justice Beldam

Lord Justice Thorpe

Sir Roger Parker

QBCOF 96/0309

Institute Of Chartered Accountants
and
H.m. Customs And Excise

MR A R THORNHILL QC and MR RUPERT BALDRY (instructed by Messrs Denton Hall, Milton Keynes) appeared on behalf of the Appellant.

MR KENNETH PARKER QC (instructed by the solicitor of Customs & Excise) appeared on behalf of the Respondent.

LORD JUSTICE BELDAM
1

In this appeal the Institute of Chartered Accountants of England and Wales ("the Institute") seeks a decision from the court that it is entitled to charge Value Added Tax ("VAT") on the charges it makes for granting licenses and certificates to practitioners in accountancy who carry on investment business, practice as auditors or as insolvency practitioners.

2

In granting licenses and certificates in these spheres of activity the Institute is 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.

3

The regulation activities of the Institute

4

The Regulation of Investment Business

5

The activities of the Institute in regulating investment business are carried out under the Financial Services Act 1986. The Act is intended by Parliament to provide the principal source of statutory control over investment business. One of its main purposes is to protect investors by a system of regulation based as far as possible on self regulation subject to government surveillance. It is therefore enacted that no person may carry on investment business unless he is an authorised person under ch. 3 of the Act. A person can obtain authorisation through a recognised professional body. A body such as the Institute obtains recognition by applying to the Secretary of State. To obtain recognition the professional body must have rules restricting the carrying on of investment business to certified persons and must define the type of business permitted and the circumstances in which it may be carried on. To be recognised the professional body must have adequate arrangements and resources for the effective monitoring of the continued compliance by the person certified by it, must make effective arrangement for investigating complaints and must make and enforce rules for carrying on investment business. In short, its function is to ensure high standards of integrity and fair dealing by those it certifies. It is also required to monitor the activities of those whom it has authorised to secure that those standards are maintained. The issue of a certificate to an individual practitioner is in itself merely a recognition that the Institute (or the Committee to which it entrusts the functions) has performed the obligations entrusted to it by Parliament in making sure that the practitioner is a suitable person to be authorised to conduct the type of business in question. Whilst the Institute makes a charge for issuing the certificate, the charge is simply related to its costs in carrying out its statutory obligations. Thus although the Institute has supplied a service in issuing the certificate and obtains consideration for it, the substance of the Institute's activity is in performing its obligations under the Act and not in providing a service to the practitioner.

6

The recognition of company auditors

7

Sec. 24 of the Companies Act 1989 states that the main purpose of Part 2 of the Act is to secure that only persons who are properly supervised and appropriately qualified are appointed company auditors and that audits by persons so appointed are carried out properly, with integrity and with the expected degree of independence. The manifest importance of these functions is to protect the public from loss due to fraud and if a person acts as a company auditor while ineligible for office he is guilty of a criminal offence. To be eligible for appointment as a company auditor, a person has to be a member of a recognised supervisory body and be eligible under the rules of that body. The Institute is a recognised body, having satisfied the criteria required by the Secretary of State. It must maintain and enforce rules as to the eligibility of persons for appointment as company auditors in the conduct of audit work. To be recognised the Institute must have effective arrangements for monitoring and enforcing compliance with the requirements of the Act and for disciplining members and investigating complaints. The Institute was recognised by order of the Department of Trade and Industry in July 1991 after publication of draft Audit Regulations. To carry out its function as a recognised supervisory body the Institute appointed a registration committee which grants, withdraws or suspends registrations, imposes restrictions on those who undertake audits, investigates failures to make reports and monitors the performance of registered auditors.

8

The Institute maintains a register and in return for registration charges an initial and annual fee which depends on the number of members of firm and the size of its practice. Whilst entry onto the register and the register's maintenance is a service provided in return for a consideration paid by practitioners, the charges represent the cost divided among the practitioners so registered of carrying out the Institute's obligations under the Companies Act. The maintenance of the register represents a fraction only of the activities of the Institute in performing those obligations entrusted to it for the protection of the public.

9

The regulation of insolvency practitioners

10

The Insolvency Act 1986 was passed by Parliament following the Report of the Review Committee on Insolvency Law and Practice chaired by Sir Kenneth Cork and published in June 1982. As the long title of the Act states, it includes enactments relating to the functions and qualification of insolvency practitioners, the public administration of insolvency and the penalisation and redress of malpractice and wrongdoing. A person acts as an insolvency practitioner if he acts as a liquidator, administrator or administrative receiver, trustee in bankruptcy or as interim receiver of property of a bankrupt. These are positions of public responsibility demanding particular qualities of integrity, fair mindedness and good judgment, quite apart from accountancy expertise. By sec. 389 of the Act it is an offence to act as an insolvency practitioner without qualifications and the provisions of sec. 391 are designed to secure in the public interest that only properly qualified persons are appointed to act as insolvency practitioners. The Institute is duly recognised as a professional body to regulate the practice in insolvency and to maintain and enforce rules for securing that only fit and proper persons are permitted to act as insolvency practitioners. Insolvency Licensing Regulations were drawn up and approved by the Secretary of State which are administered by the Practice Regulation Directorate of the Institute through a licensing committee. This committee can grant, reject, renew or withdraw licenses. The committee has powers to require disclosure by practitioners of information and records and it can initiate investigations. It is the function of the Institute through its licensing committee to ensure that insolvency practitioners have not only the acceptable professional qualification but also have obtained a bond of security complying with the requirements of the relevant insolvency practitioners regulations. The Institute's licensing commission monitors activities to ensure that standards are maintained.

11

The Institute charges an insolvency licensing fee on an individual basis but again it is based solely on costs incurred by the Institute in performing its statutory obligations.

12

The service provided to the practitioner in issuing a licence is similarly a small part of the activities of the Institute in carrying out its statutory obligations.

13

The charges made by the Institute for the licenses, registration and certificates issued for the three types of business are set by the Institute each year to enable the Institute taking one year with another to break even.

14

On the supplies used in performing these services the Institute pays VAT. It is registered for VAT but on 25th March 1994 the Commissioners of Customs & Excise ruled that although the Institute supplies services in return for the fees charged to its members for authorising them to carry on the three types of business, such services are not made in the course or furtherance of a business and consequently the Institute could not charge VAT for the services. The effect of this ruling is that the Institute is unable to recover, by way of set off, the VAT which it pays for the supplies used in providing the service against VAT which it would have recovered from its members had VAT been payable.

15

The proceedings

16

The Institute appealed to the VAT Tribunal. The Tribunal (Mr Stephen Oliver Q.C., Chairman) upheld the Commissioner's ruling. The Tribunal held that under domestic law the Institute had to establish that the supplies it made in carrying out these activities were made in the course or furtherance of a business carried on by it in accordance with sec. 4(1) of the VAT Act 1994. Directing itself that the Institute made supplies when granting licenses, it went on to consider the real nature of the Institute's licensing activity, concluding that the predominant...

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