The Cup Trust’s £46m gift aid claim can be withdrawn, the High Court ruled yesterday.

The Cup Trust was set up as a charity tax-avoidance scheme with one trustee – a private trust company incorporated in the British Virgin Islands. The ruling, subject to any appeal, permits the Cup Trust charity to withdraw its £46m tax claim.

In a statement, the Charity Commission – which brought the case to the High Court – said it welcomed the decision.
The regulator said that it was concerned that “public trust in charities would be undermined if this charity was required to continue with its tax avoidance claim”.

It said that by “asking the court to hear the issue, rather than taking the decision itself, the Commission was free to make arguments based on its objective of promoting public trust and confidence in charities”.

In the judgement yesterday, Mr Justice Snowden agreed with the Commission that the interim managers were entitled to withdraw the charity’s tax claim, following advice from tax barristers that the claim had a negligible chance of succeeding.

The case had been opposed by Mounstar (PTC) Ltd, the charity’s corporate trustee. Mountstar had, through its director, offered to pay for the charity to bring the tax litigation, but the court confirmed that the interim managers, from charity law specialists Stone King, were entitled to reject this offer.

The judge agreed the interim managers were right to be concerned about the offer, and justified in questioning the motives behind it.

Chris Willis Pickup, head of litigation at the Charity Commission, said that the judgment is “good news for charities and for the public who support them”.

He said: “The public can be confident that charities will not be used improperly as part of tax avoidance schemes, and charity trustees should welcome the court’s clear guidance on their legal duties in tax litigation. The court has accepted the Commission’s approach in the case and dismissed the arguments of those who sought to use a charity for tax avoidance.

“Cases like this will strengthen public trust and confidence in charities, as they show the donating public that we will take action to tackle abuse. The vast majority of charities serve their beneficiaries but action will be taken against the few who abuse the privilege of charitable status.”

Jonathan Burchfield and Ann Phillips of Stone King, the interim managers appointed by the regulator, said: “We are pleased that the court has accepted (subject to any appeal) that our decision to withdraw the charity’s gift aid claims was an appropriate one for us to have taken. We also welcome the court’s agreement that the exceptional circumstances of this case justified the Charity Commission having referred our decision to the court.”

The Commission’s statutory inquiry into the charity, which is still registered, is still ongoing. It said it will report on the findings once the investigation is complete.

Inquiry and appeal

The Commission opened its investigation into the Cup Trust on 12 April 2013, following allegations that the charity was established “to further the avoidance of tax with only minimal sums given to charitable causes”. The donors received almost all their money back while benefitting from the gift aid scheme.

The Commission went on to appoint an interim manager to the charity, to take over the powers and duties from Mountstar. This was challenged in a First-Tier Tribunal by the trustee, which rejected the challenge and upheld the Commission’s decision.

The Commission brought this case to the High Court to seek approval of the interim managers’ decision to withdraw the charity’s claim of £46m in gift aid tax relief. This claim had been made by the trustee before the regulator had intervened.

A spokesman from HMRC said: “We do not comment on individual charities.

"HMRC thoroughly investigates any charity which we suspect of not complying with the rules.  We relentlessly pursue those who abuse charity tax reliefs, with serious consequences for those who abuse the rules from financial penalties to criminal conviction.

"We work closely with the Charity Commission to make sure that charities meet their responsibilities and have increased the number of staff checking charities to ensure the UK's tax rules are respected across the board.”