The reputation of the Cup Trust’s corporate trustee Mountstar PTC Ltd has been “besmirched” by the Charity Commission’s decision to appoint an interim manager to the charity, the Charity Tribunal heard yesterday.

Matthew Smith, counsel for the Caribbean-registered Mountstar, claimed that the Charity Commission’s first assessment of the Cup Trust, following a non-statutory investigation from 2010 to 2012, was correct. It closed that investigation without taking any action.

Mountstar is challenging both the Commission’s recent decision to open a statutory inquiry into the Cup Trust and its appointment of an interim manager.

The Commission only changed its approach after the Cup Trust’s involvement in a tax avoidance scheme was exposed in The Times and the Commission was publicly criticised by the Public Accounts Committee for not taking action.  

The new, harder line taken by the Commission following these, Smith suggested, was driven by one of two motives – to salvage its own reputation, or to procure the public release of the donors’ names in order to embarrass them into withdrawing their gift aid claims.

Smith said this was not a proper or proportionate use of the Commission’s powers.

But Tribunal chair Judge Nigel Gerald said it would have been odd if the Commission wasn’t galvanised to look again at the case in light of the publicity, and that it was surely allowed to change its mind. 

Commission had a ‘pretext’

Smith also suggested that the Commission’s stated motives for bringing the inquiry weren’t altogether honest. He read out an email from Commission chair William Shawcross to another Commission board member, shortly before the inquiry was opened, which said: “Apparently because HMRC told them they would fine them a small sum, that gives us a pretext.”

Smith quoted a dictionary definition of ‘pretext’: “a reason put forward to conceal the real purpose or object; excuse; pretence” and concluded: “This internal document from one decision-maker to another gives rise to the case that the Charity Commission’s stated reasons are not its true reasons.”

Largest tax avoidance scheme

But Ben Jaffey, representing the Charity Commission, said that while Smith was trying to paint a picture of a case that had little to do with Mountstar, in fact it was all about the Cup Trust and its corporate trustee operating “the largest tax avoidance scheme of its kind”.

The regulator’s previous decision not to open an inquiry was, in retrospect, a mistake, Jaffey said, but the complexity of the tax avoidance scheme meant it was not immediately obvious what was going on.

“But the proper response [once new concerns came to light] was to fix that error, not perpetuate it.”

The Commission’s interest in the case was rekindled by The Times’ reports about the tax avoidance scheme, then also by the charity’s reluctance to co-operate with HMRC demands and by the conflicts of interest that were uncovered.

In one conflict, Jaffey said, “the person who ran the tax advisory firm advising the donors was, at key times, also a director of the corporate trustee of the charity”.

“The Charity Commission does not believe this was a scheme operated at arm’s length, for the benefit of the charity.”

The regulator’s concerns were further amplified by the interim manager’s discovery of five blank cheques signed by two directors of Mountstar.

“These were real concerns that justified the move to open a statutory inquiry and appoint an interim manager,” Jaffey concluded.

Cup Trust: Tax scheme is lawful

Smith quoted from a Commission email dated 2011 in which it stated it could not see the point of a statutory inquiry. The Cup Trust’s subsequent late compliance with an HMRC notice was not sufficient misdemeanour to warrant a statutory inquiry, he said.

“The question at the heart of this is this,” Smith said. “What is the proper response by a charity regulator to the lawful, albeit perhaps unpopular, participation by a charity in a tax scheme which seeks to benefit the charity, whether or not it works, and where the efficacy of the scheme has yet to be determined by the body charged by Parliament with resolving that question?

“If Parliament doesn’t like it, it can change the law. It is not for members of the House of Commons in committee and it is certainly not a job for the Charity Commission.”

Smith also argued that the Commission had not identified sufficient “mismanagement or misconduct” to appoint an interim manager, and that his client’s reputation had been “besmirched” by that intervention.

If the Tribunal does find the Charity Commission did act improperly by opening the inquiry, it can then choose whether or not to quash that inquiry.

The case is continuing.