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Charity tax-avoidance scheme did not break any charity laws

Charity tax-avoidance scheme did not break any charity laws
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Charity tax-avoidance scheme did not break any charity laws14

Governance | Kirsty Weakley | 31 Jan 2013

A charity at the centre of a multi-million pound tax-avoidance scheme had been investigated by the Charity Commission, but was allowed to continue operating because it had not broken any charity laws.

The Times today revealed that the Cup Trust had enabled its donors to avoid a total of £46m in tax through gift aid incentives.

The newspaper’s investigation found that the Trust used an offshore bank loan to buy £1m gilts, which it then sold to investors (who had paid a fee to join the scheme) for a nominal fee. The Trust then donated about £500 to charity on the investors' behalf and the investors would sell the gilts and “donate” the money to the Cup Trust. This allowed them to claim between £250,000 and £375,000 (depending on whether they paid tax at 40 per cent or 50 per cent) in gift aid relief. Meanwhile the Cup Trust used the donation to repay the loan.

The Cup Trust was set up in 2009 and raised £176m from donations during its first two years but has distributed just £55,000 to charity. In documents filed with the Commission the charity states that it awards grants to small start-up children’s charities and that most grants are “unsolicited”.

It has just one trustee – Mountstar (PTC) Ltd – and no members of staff. The company is registered as based in the Virgin Islands and has three directors - Matthew Jenner, John Mehigan and Darren George Stones, who are based in London.

An HMRC spokesman said: “We can’t discuss the named charity for legal reasons but the government has made nearly a billion pounds available to us to police the tax rules. Where we find tax avoidance we challenge it and stop it as shown by a string of high-profile successes in the tax courts.”

The HMRC told civilsociety.co.uk that it is working on a number of potential criminal investigations in relation to gift aid but that no charges have been brought yet. HMRC advised recently that it had thwarted more than £20m in fraudulent gift aid claims in the last two years

Following the revelations this morning the Charities Aid Foundation has said it will hold on to any funds donated for the Cup Trust via its site which enables individuals to search for and donate to registered charities.

A spokesman told civilsociety.co.uk that: “Although we are not a regulator, CAF has taken the decision this morning to hold funds donated to the Cup Trust until we get clarification from our regulator.”

Bubb: 'Our regulator has failed'

This morning leading figures called for an explanation from the Charity Commission and HMRC and warned that the reputation of the charity sector could be damaged.

Sir Stephen Bubb, chief executive of Acevo, said: “For me the astonishing fact is the failure of the Commission.

“Our regulator has failed in its key role.”

He called on William Shawcross, newly-appointed chair of the Commission, to look into its previous investigation. He said: “Our sector cannot afford to suffer any loss of trust. The Commission must now act to stop this.”

He also called on HMRC to act, stating: “When we had the big row on tax reliefs and ministers said there was abuse I demanded publicly to know who these charities were and what action was being taken to clamp down. No answer did I get.”

John Hemming, chair of Charity Tax Group, told civilsociety.co.uk that this case highlighted the importance of HMRC clamping down on fraud. He said: “The approach by the Revenue to tighten up on abuse was thought to be excessive by some...but this case does prove that the Revenue is having to tackle this kind of issue.”

Hemming added: “It is odd that the Charity Commission wasn’t able to spot this amount of money going in and the amount spent for charitable purposes meant there was obviously some problem there – that needs to be addressed.”

He added that CTG would be happy to work with HMRC to tackle the problem as “this sort of abuse is bad for our sector as a whole”.

Sir Stuart Etherington, CEO of NCVO, described the case as “shocking” and said it “raises important questions about the regulation of the charity involved".

He added: “The vast majority of gift aid is used to support genuine charitable causes. It is important that these issues are resolved quickly and proportionately and in a way that doesn't damage the tens of thousands of charities that use donations as they are intended.”

Commission unable to act

The Charity Commission investigated the Cup Trust between March 2010 and 2012. 

In a statement a spokeswoman for the Commission said: “The Commission has considered very carefully the concerns which have been raised with us about the Cup Trust. We have established that it is a charity which we are required by law to register.

“We have looked into its system of fundraising, which serves to obtain the benefit of gift aid both for the charity and for others who are involved in the arrangements.”

She explained that: “We have not been able to intervene as, after our careful considerations we could not conclude that the trustees have not complied with their duties under charity law. This is an unusual charitable structure and operation and it remains to be seen whether the gift aid claims will prove successful. We await the outcome of this. Tax matters remain a matter for HMRC.”

While the Charity Commission was investigating, the Trust was able to continue its activities, which included continuing to file gift aid claims.

The Cup Trust did not respond to civilsociety.co.uk’s request for comment.

Michael King, partner at Stone King, said: "I do think that the directors of Mountstar PTC Ltd, the trustee, have questions to answer about where the alleged income has been spent. Without seeing the Charity Commission report on the investigation, I cannot say more but it does seem odd that the accounts show income of £78m and expenditure of almost the same amount in what are called “costs of generating voluntary income”, resulting in assets of merely £107,000 and only £55,000 charitable grants.

"I remain of the view that it is curious that the Commission will register a charity with such wide objects (effectively anything charitable in English law) whose trustee is a corporate body incorporated in the British Virgin Islands."

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Rosie Hamilton
Head of Communications
ICSA
8 Mar 2013

We'd support changes to the regulatory regime to enable the Commission to tackle these ‘scams’ more effectively in the future. Closer working between HMRC and CC to be welcomed to ensure any similar arrangements are highlighted and joint action taken to protect the public’s trust and confidence, as well as tax payers’ money. The majority of charities are delivering public benefit and those that don’t sufficiently demonstrate it should be held to account.

Louise Thomson
Head of Policy Not for Profit
Insitute of Chartered Secretaries and Administrators

Guest
3 Feb 2013

As a former member of Charity Commission staff, I was contacted before Christmas and asked if I knew anything about the Commission's investigation of this particular charity and I was informed it was for an article to be reported in The Times. I did not then know anything about this particular charity, nor did I engage in communication wtih The Times. However, once the name of the charity had been mentioned to me, I carried out my own research. It took me under an hour in December, to look at the accounts, perform basic internet research and discover nearly all of the information now reported by an investigative journalist. Basic search engine research also uncovered one of the good causes that had been the recipient of £25K of the £55K donated to unnamed good causes by The Cup Trust. For a qualified accountant, this was all very easy to establish - as already stated this was less than an hour's work. As this part was easy, it can only be assumed that the 2 year Charity Commission investgation that followed must well and truly have involved something more complex. If the regulator really was left powerless to legally act, then something needs changing - urgently. What will happen if the Charity Commission is saying that legally this organisation is able to continue as a charity, as it appears to be saying, but if HMRC concludes that the organisation is not eligible for charity tax reliefs?

Kevin Russell
Technical Director
Stewardship
5 Feb 2013
Response to [Guest]

I think that Guest makes a good case that the law must require a charity to demonstrate that it is not only established for charitable purposes for the public benefit, but that its activities, on an ongoing basis, demonstrate that public benefit.

Dave Brown
1 Feb 2013

To Chris, the Trustee:

Sophisticated?

Seemed very straightforward and unsophisticated, which is much more worrying on many fronts.

Chris Zealley
trustee
Various charities
1 Feb 2013

The Charity Commission is being targeted and kicked for doing the very limited job now delegated to it by the government.

Tax avoidance is the job of HMR, which is expert in the field.

The CC has only scarce resources. It is unrealistic to expect them to unearth and pursue sophisticated fraud.

John Weth
Chairman
Association for Charities
1 Feb 2013

Sir Stephen Bubb writes that 'for me the astonishing fact is the failure of the Commission. Our regulator has failed in its key role'.

Readers of 'Civil Society' over the years, and more recently, readers of submissions to the Public Administration Select Committee's (PASC) current review, may not be as astonished as Sir Stephen to read of alleged Commission regulatory failures. However, the Times' Cup Trust story, following on from a Guardian story on the sale of the Spiritualist Society's Belgrave Square HQ (both cases known to the Commission) causes one to wonder whether the new Commission Chairman's confident claim to the PASC of Commission regulatory excellence is based on evidence and fact.

If, as the PASC and Commission appear to agree, the Commission's key reason for existence and first priority is proper and effective regulation, what action, if any, could be taken (and by whom) if the Commission's regulatory performance fails to 'come up to scratch'? Can the regulator ever, in fact, be itself subject to proper and effective regulation by any external body? Or can we hope that the Commission will self-regulate? After all, do we not have a Chairman, Chief Executive and Board capable of securing proper, proportionate, timely and effective regulation? Or, are we seeking and expecting a regulatory standard which cannot be reached, given current conditions and available resources?

Jonathan Ashton
Jobbing fundraiser
1 Feb 2013

At the core of the tax avoidance scheme that The Cup Trust benefits from is a very unusual transaction, which is being treated as appropriate behaviour by the Charity Commission and possibly HMRC. The rich person is sold a bond worth £1m in return for a nominal amount and they then "gift" it back to The Cup Trust (enabling the donor to take advantage of Gift Aid). That appears legally to be the case, but is it right for the Charity Commission to allow this approach and for HMRC to treat it as a Gift Aid situation?

* In most people's eyes, a "gift" is something that you give without being under an obligation to transfer it back to the other person. If you owed it to them (which presumably is not legally the situation here) then it wouldn't be a gift, it would be the repayment of a loan. Gift Aid was introduced to encourage giving. If the rich person were in some sense just returning the money, then why should the Gift Aid rules allow this? Suppose as a charity I give you, my regular supporter, some money under deed of covenant - i.e., it really is a gift - but I know you are 99% likely to give it back to me. Should I be able to claim Gift Aid? Should you?
* Let's look at it now from the Charity Commission's perspective. The Trustees are effectively handing over vast chunks of value each time to rich people that they barely know (the charity pays £1m at a time for the bond but get a nominal return on their sale to the rich person, according to the Times.) Suppose that one of these rich people doesn't make the anticipated gift back to the charity. What should happen now? To the rich person? (Presumably nothing) To the Trustees, who are supposed to manage their assets prudently? Now, that doesn't seem to have happened, but what about the scale of risk being taken here?
* In my mind this is distinguishable from the kind of "almost contractual" situations that you see on the front line where charities claim Gift Aid - such as where you gain entry to a building and there's a very strong expectation that you make a donation of a certain amount in order to come in. The difference is that The Cup Trust situation in some senses could be seen as in a moral or social, though not a legal, sense, a loan, in all but name, that gets repaid, using the the mechanism of bonds as the way the value is transferred around. There is no reason why the Treasury shouldn't be able to identify such "socially a loan" situations and draw up appropriate Gift Aid rules.

David Jennings
Private individual
31 Jan 2013

The issues regarding the Charity Commissions inability to properly use its regulatory powers and discharge its statutory duties are becoming alarmingly apparent. ( see written evidence regarding Greenfinch Charitable Trust published on the Public Administration Select Committee website) The Charity Commission are progressing the systematic deregulation of the sector inappropriately,
while knowingly attempting to avoid any requirement to undertake regulatory Enquires , one only has to look at the number of times the Charity Commission has sought recovery of assets or financial gains made by controllers of charity contrary to law and governance in the past ten years, the answer is none, which is the same answer for incidents of knowingly pastings false information to the Charity Commission and misrepresenting accounts information within annual returns, it is clear the Charity Commission no longer seek to regulate the sector and go to considerable lengths to avoid transparency and external scrutiny.

Kevin Russell
Technical Director
Stewardship
31 Jan 2013

I want to make it clear that in the comment that follows, I in no way condone the morally indefensible behaviour alleged of those behind Cup Trust.

However, we are all getting excited on the basis of limited facts in a media report. Regulators are not necessarily free to be open with the press or other enquirers.

So far as I can see:

- Cup Trust was formed on 10 March 2009
- The Charity Commission began its investigation in April 2010, ie before the charity's first accounts had even been filed. It closed the investigation in March 2012, knowing that it may need to intervene again and, I suspect, having dialogued fully with HMRC along the way.
- More importantly, as at 28 February 2012, HMRC had not met any of Cup Trust's Gift Aid (or transitional relief) claims. I suspect that they have still not paid any of them.
- The 'fundraising scheme' that they adopted was, by Cup Trust's own admisssion 'a temporary opportunity'. I would be fairly certain that the 'opportunity' is now closed by the Tainted Charity Donations rules.

Unless the UK public are prepared to accept wide sweeping and very general anti avoidance legislation, which will kill enterprise in the UK through uncertainty of perfectly bona fide transactions, HMRC are always going to be trying to second guess where the tax avoiders are going to go next.

Nick Aldridge
31 Jan 2013

The Gift Aid going to the charity was presumably the additional income that enabled it to sell the bonds to investors at nominal rates and stay within the law.

Mark may be right since under his suggested model the charity would have had to pay investors directly, which would have been much more legally problematic.

Jon Ingham
Director of Fundraising
Northern Ballet
31 Jan 2013

I have always promoted and defended Gift Aid on the grounds while the supporter is still out of pocket it directly benefits the charity.

Today's news does not mean that we need new rules but we possibly need new regulators.

Jon

Stolen
31 Jan 2013

So how does £176m fund raised and £55,000 charity distribution not attract the attention of the Commission, except that someone passed it as normal?

Mark Astarita
Director Fundraising
British Red Cross
31 Jan 2013

The Times story of terrible abuse of Gift Aid and it's intended purpose to aid charity and not to avoid tax would never have happen if all gift aid went to charity not HR taxpayer in rebates as it does for standard rate tax payers. At the stroke of a pen this could be resolved. The giveitbackgeorge campaign was wrong we should be calling for giveitallbackgeorge

Paula Grevett
Treasurer
ACSABE
31 Jan 2013

In that case the laws must be changed.

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