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."