The Charity Commission has published a statement of the results of an Inquiry (“the Inquiry”) into The Cup Trust (‘the Charity’) which was removed from the Register of Charities on 26 May 2017 (formerly a registered charity number 1129044).

The Charity Commission has said there was “clear misconduct and mismanagement” at The Cup Trust, a charity at the centre of a tax avoidance scheme which earned its founder £2m in fees.  The Cup Trust was a charity used as a large-scale tax avoidance scheme. It received more than £176m between March 2009 and March 2011, spent that money on buying government bonds and then sold those bonds for less than £17,000. The charity donated only £55,000 to good causes but put in claims for £46m of Gift Aid, which were not successful.

The full Charity Commission report can be read here, with relevant excerpts reproduced below.

The Commission’s role in tax matters

As a result of their legal status, charities enjoy certain tax benefits and many use the HM Revenue and Customs’ (“HMRC”) Gift Aid scheme to increase the value of charitable donations by reclaiming basic rate tax on a donor’s gift. If the donors pay higher rate tax the individuals can also claim extra relief on these donations, reducing the amount of tax paid on their income. Whether a charity or its donors are lawfully able to claim tax relief and the issue of whether a tax scheme is legitimate or not is determined by HMRC.

The Commission’s remit is in part to determine whether an organisation is a charity under the law and to ensure trustees comply with their legal obligations in managing charities. It has a statutory function to identify and investigate abuse and mismanagement in charities and, where appropriate, take protective or remedial action. It is for HMRC, not the Commission, to decide the legitimacy or otherwise of tax matters in relation to charities.

The Commission’s role as charity regulatory therefore focuses on ensuring that trustees discharge their legal duties as charity trustees in managing and administering the charity properly and responsibly. Where issues are raised about taxation matters or concerns about the operation of a charity being examined by other regulators, the Commission considers whether they indicate misconduct or mismanagement in the administration of the charity and whether it needs to protect charity property.

The Act contains a set of specific statutory gateways that permits the Commission lawfully to give information to and receive information from, other public authorities, including one specifically for and with HMRC. HMRC and the Commission have regular discussions about charity matters, including tax avoidance issues. There are regular exchanges of information about charities of common concern, under the statutory gateway. However, the Commission is prohibited under the law from confirming which charities these discussions relate to, whether it has even discussed them with HMRC or disclose anything about these discussions. This is because under section 57(3) of the Act it is a criminal offence for the Commission to disclose this information without the express consent of HMRC.

Following the 2010 investigation, after opening the Inquiry and in light of the public interest in these matters, the Commission updated and published further information on charities’ fiduciary duties as regards tax matters and its work with HMRC on these

The 2013 Inquiry

On 12 April 2013 the Commission then opened a statutory inquiry (“the Inquiry”).

The decision was explained to the Trustee that it was made in light of the inherent conflicts of interest growing more acute the longer the gift aid claim took, the likelihood of HMRC challenge and litigation, as well as concern that the Trustee was failing to provide the necessary responses to HMRC, as evidenced by their need to issue financial penalties.

The Commission also explained that the Inquiry was opened to examine the following issues:

• the apparent failure of the Charity to comply with a legal notice issued by HMRC to provide information with regard to the Charity’s gift aid claims
• the Charity’s participation in the tax avoidance/ gift aid Scheme, that was now likely to fail, given HMRC’s public position on the type of avoidance scheme in which the Charity was involved and the implications for the Charity if it did fail
• conflicts of interest, the extent to which they were properly managed, in particular in connection with one or more directors of the Trustee in relation to the Scheme
• payments and/or benefits to those involved with the Charity and/or in the Scheme, including where if there were fiduciary relationships, any duty to account to the Charity
• the extent to which the Trustee discharged its duties and responsibilities as charity trustee

Conclusions of the 2013 Inquiry

The Inquiry concluded that:

Mountstar as trustee of the Charity, acting through its directors, did not properly or fully discharge their legal duties responsibilities as trustee in their decision making entering into and managing the Charity’s participation in the tax avoidance Scheme and oversight of the Charity’s affairs.

Whilst Mountstar did not profit from the participation in the Scheme itself, one of the directors of Mountstar, the person which founded the Charity and promoted the Scheme, Mr Jenner, profited from at least £2m in fees and/or commission. He and others would have profited further, and the Charity been liable to pay substantive fees, had the gift aid claims and the Scheme succeeded.

Most of the key players behind the Scheme or playing a significant part in its key transactions were connected to and/or knew Mr Jenner. For the Charity, those relationships gave rise to significant conflicts of interests that when it came to Mountstar acting through the directors making decisions about the affairs of the Charity entering into the Scheme, it meant the conflicts were so inherent they could not be properly managed under charity law. The various conflicts of interest were numerous, serious and substantial. Those conflicts and their impact were on the whole not fully identified nor appreciated when Mountstar and its directors were taking decisions about the Scheme and the affairs of Charity.

The net effect of the conflicts of interest was that they were so inherent and the parties so close they affected the ability of the directors to make decisions for Mountstar when acting as decision makers for Mountstar in affairs of the Charity to such an extent that these conflicts could not be properly managed. It is difficult to see how any of the directors of Mountstar could have made decisions for the Trustee in a way that ensured that Mountstar, as the trustee, complied with its legal fiduciary duties under charity law.

Mountstar, acting by its directors, knew or ought to have known that the Scheme was an artificial arrangement, created to give the impression all parties involved in the Scheme were separate and independent of each other when they were not. Mountstar knew or ought to have known the Scheme was designed to obtain relief in a way that was not as intended, namely to stimulate genuine charitable giving.

There was clear misconduct and mismanagement by Mountstar in the administration of the affairs of the Charity, particularly connected to entering into and managing the Charity’s participation in the tax avoidance Scheme. Mountstar, as the sole corporate trustee of the Charity, was responsible for misconduct and/or mismanagement in the administration of the charity, including:

• failing to properly identify and adequately manage conflicts of interests and comply with the Charity’s conflicts of interest of policy, which required Mountstar, and its officers, to declare any conflicts of interest and to take appropriate action either to obtain authorisation or to remove a conflict
• poor decision making in entering into the Scheme, including:
  • failure to ask questions and take steps a reasonable ordinary prudent business person would about the Scheme and the Charity’s participation in it
  • failure to take, or consider taking, independent professional advice for the Charity about the merits, fees and risks with participating in the Scheme
  • failure to equip itself with sufficient information to properly consider whether to enter into the Scheme

The individual directors’ decision making, and so Mountstar’s collective decision-making, was inadequate and fell below standards expected of competent and prudent trustees. As a result of its poor decision making, Mountstar failed to act with reasonable care and skill, and acted in breach of its fiduciary duties in relation to the Charity when it approved the Scheme. Mountstar did not demonstrate that it acted in the best interests of the Charity entering into the Scheme.

• poor financial management including the practice of Mountstar signing blank cheques to be drawn on the Charity’s account
• the non-cooperation and lack of action with HMRC showed by Mountstar acting through Mr Jenner, over a sustained period, resulting in financial penalties being incurred by the Charity, with no good explanation.

Mountstar, as the sole corporate trustee of the Charity at the time of the misconduct and mismanagement, was responsible for it, knew of the misconduct or mismanagement and failed to take any reasonable steps to oppose it, or contributed to or facilitated the misconduct or mismanagement. Mountstar, acting by its directors at the time, by its decision making contributed to or facilitated the misconduct and/or mismanagement.

As Mountstar acted by the agency of its directors, they bear the collective responsibility for the Charity’s poor governance and decisions and actions taken by Mountstar as the corporate trustee of the charity. They therefore facilitated and were responsible for the misconduct and/or mismanagement by Mountstar in the administration of the charity, knew of the misconduct and/or mismanagement and failed to take any reasonable step to oppose it, or contributed to or facilitated the misconduct and/or mismanagement.

Using powers introduced by the Charities Act 2016, the Commission acted in 2017 to disqualify the company Mountstar (PTC) Limited, from being a charity trustee for the maximum period of 15 years. The Commission also acted to disqualify the three directors of Mountstar because they were directors of the corporate trustee responsible for mismanagement under those new powers, from being a charity trustee, also for the maximum period of 15 years.

The Charity has not lost money from participation in the Scheme, but the Scheme, and the Charity’s participation in it, has greatly damaged public trust and confidence in both the Charity, necessitating its closure, and in charities more widely. The effect of this matter has been to undermine public confidence in the lawful and fair operation of gift aid and to give the impression that a charity can be used as a vehicle for aggressive tax avoidance. This is of great concern to the Commission particularly as there is a risk of potential loss of other tax reliefs to the sector as a result of, or as a necessary by-product of, action to stop or close such schemes.

As the Commission’s subsequent guidance on Charity Tax Reliefs [link] says the Commission expects charities to fulfil their obligations and take every reasonable step to ensure that the charity is not a party to, and does not enter into, any tax planning arrangements that are imprudent or could bring the charity or the charitable sector into disrepute. The principal aim of tax avoidance schemes is usually to confer advantage on private businesses or individuals with any benefit to a charity being a by-product of the scheme rather than its principal aim. Apart from being subject to a challenge from HMRC, such arrangements are not consistent with trustees’ duties to act prudently and to further the charity’s purposes in its best interests for the public benefit.

Issues for the wider sector

Charities, tax benefits and reliefs

As a result of their legal status, charities enjoy certain tax benefits. Whether a charity or its donors are lawfully able to claim tax relief and the issue of whether a tax scheme is legitimate or not is determined by HMRC (In its briefing ‘Tackling tax avoidance’, HMRC describes tax avoidance as ‘bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law.’ HMRC sees a small proportion of tax payers who actively seek opportunities to avoid paying tax and promoters of avoidance schemes often market them with promises of large savings and underplay the risks. HMRC states that it ‘relentlessly challenges tax avoidance and has a highly successful record of defeating avoidance scheme in the courts). The Commission’s role and remit is to determine whether an organisation is a charity under the law and to ensure trustees comply with their legal obligations in managing charities. The Commission has a statutory function to identify and investigate abuse and mismanagement in charities and, where appropriate, take protective or remedial action.

Charity trustees are under a fiduciary duty to act exclusively in the best interests of their charity in the management of its affairs and the application of its property to further the charity’s purposes for the public benefit. In so doing, they must exercise reasonable care and skill and act to the standard of an ordinary prudent business person in the conduct of their own affairs. This duty makes it appropriate for them to engage in reasonable and prudent tax planning and to take advantage of available statutory tax reliefs relating to charities where these will assist the work of the charity, encourage genuine donations and coincide with the purposes for which these reliefs were created.

Tax planning arrangements

Where trustees seek to enter into tax planning arrangements they must satisfy their duty of prudence and ensure:

• the arrangements are lawful
• they have power to enter into the arrangements in question
• they are neither conflicted in a way which cannot be managed nor have the potential to benefit personally from any arrangement
• they take and consider appropriate independent specialist advice about obtaining fiscal relief or minimising tax in the context of their responsibilities, such advice being independent of both the charity and the promoter of any proposed arrangements
• a record is kept of their decision-making including any tax law, tribunal decision or professional advice upon which they are relying
• they take into account and consider any published guidance and advice as to the lawfulness of the proposed arrangements offered or available from HMRC
• by entering into the arrangement, that they do not expose any of the charity’s property to undue risk
• that the proposed transactions will not damage the reputation of the charity and that they have considered how the character of the arrangement fits with the aims of the charity and the ethos of its donors and beneficiaries
• overall, that the arrangements are in the best interests of the charity

Tax Avoidance

Trustees need to be aware that charities may be used by others in tax planning arrangements and sometimes a charity may be needed in a structure to make the proposals work, for tax, or other purposes. The people responsible for ensuring that any involvement of the charity is in its best interests are the trustees. Trustees must remember that what is in the best interests of the charity may not be in the best interests of the other parties. Sometimes that may mean the charity cannot agree to be involved in the proposals and if concerns arise after they have agreed to participate, they should consider withdrawing to protect the charity’s assets and reputation.

Before entering into such schemes or complex arrangements with third parties that have significant tax implications, trustees must ensure they take independent professional advice, consider the guidance and alerts on HMRC’s website about tax avoidance schemes, carefully consider all the risks and fully record their decision making.

Trustees need to be aware that where HMRC comes across tax avoidance schemes, it actively challenges them, through the courts where appropriate. It is possible for tax avoidance schemes to be disclosed to HMRC and if this is the case, it may have been given a Scheme Reference Number (SRN) by HMRC. However, trustees need to be aware that the issue of a SRN does not mean either that HMRC ‘approves’ the scheme or that HMRC accepts that the scheme achieves its intended tax advantage. HMRCprovides further advice and information to be aware of on tax avoidance and related issues.

A charity’s involvement in tax avoidance schemes, and complicated arrangements where there is the potential for others to benefit significantly, can damage public trust and confidence in that charity and charities more generally. The Commission does not encourage charities’ involvement in these types of schemes and any breaches of charity law which may arise in connection with a charity’s involvement in such schemes will be investigated and dealt with robustly. In the course of this case, the Commission obtained confirmation from the High Court that, because of their duty to apply charitable assets prudently, charity trustees do not have the freedom to ‘take a punt’ on speculative tax litigation, even if the charity has enough money to pay for it.

Tax avoidance is challenged by HMRC and can be subject to regulatory scrutiny by the Commission. Examples of previous arrangements that have been considered to be tax avoidance in beach of trustees’ duties and responsibilities have involved:

• borrowing funds to buy investments for a charity and assigning them to individuals at a nominal price, where:
  • the investments are then sold at market value and the proceeds ‘donated’ to charity enabling it to repay the loan
  • this artificial transaction seeks to generate tax relief for individuals and gift aid receipts for the charity
• leasing empty properties from private landlords in which negligible charitable activity subsequently takes place, where:
  • the charity seeks to claim business rates relief on the property resulting in a loss of revenue to the local authority and seeks to avoid the landlord paying rates on an empty property
  • the charity may receive funding for its facilitation of this transaction in the form of a ‘reverse premium’
• serial and contrived financial transactions involving charities and companies which seek to disguise what may have been a taxable transaction

The principal aim of such arrangements is to confer advantage on private businesses or individuals with any benefit to the charity being a by-product of the scheme rather than its principal aim. Apart from being subject to a challenge from HMRC, such arrangements are not consistent with trustees’ duties to act prudently and to further the charity’s purposes in its best interests for the public benefit. The risks to the charity involved include damage to their reputation. Of great concern to the Commission are the risks of wider damage to the reputation of the charity sector in the eyes of the general public and Parliament, and the potential loss of other tax reliefs to the sector as a result of, or as a necessary by-product of, action to stop or close such schemes.

The Disclosure of Tax Avoidance Schemes (DOTAS) legislation places a duty on promoters of certain schemes to notify HMRC of the relevant details of the scheme. This legislation is operated by HMRC and not the Commission and requires advance notice of tax schemes that meet certain criteria.

HMRC and the Commission have regular discussions about charity matters, including tax avoidance issues. There are regular exchanges of information about charities of common concern, under the statutory gateway. The Commission is prohibited under the law from confirming which charities these discussions relate to, whether it has discussed them with HMRC or disclose anything about these discussions as under section 57(3) Charities Act 2011, it is a criminal offence for the Commission to disclose this information without the consent of HMRC.

Further regulatory advice and guidance can be found in the Commission’s guidance on charities and charity tax reliefs