An individual and expert approach to the law


What is the Cup Trust and what did it do?


"One would be forgiven for having some sympathy for William Shawcross who has recently succeeded Dame Suzy Leather as the Chair of the Charity Commission for England and Wales. His evidence, along with that of Sam Younger who is the chief executive, to the Public Accounts Committee on the subject of the Cup Trust and Tax Avoidance makes painful reading. I am referring to the uncorrected transcript of oral evidence given to the Public Accounts Committee of the House of Commons the members of which have not had an opportunity to approve it as a formal record.” Moira Protani, Head of Charities.

The Cup Trust is a registered charity. It has a corporate trustee called Mountstar PVC which is resident in the British Virgin Islands. It borrowed money with which it purchased bonds. It sold the bonds to rich individuals at a price well below market value. The individuals sold the bonds at market value and donated the proceeds to the Cup Trust. Those individuals may be entitled to claim gift aid relief on their donations. Under the gift aid rules, the Cup Trust would, in the normal course, be entitled to claim back the basic rate tax paid by the donors on those gifts.

Not only is the Cup Trust legally established as a charity and registered with the Charity Commission, it has also made grants to charities, albeit of a disproportionately small amount compared to the amount of money it has received in donations. The primary concerns about the Cup Trust relate to tax avoidance or tax evasion. The former is a legitimate activity. The latter is a criminal offence. As far as I am aware, it is alleged that the Cup Trust was engaged in tax avoidance. But it remains to be seen whether it was successful at avoiding tax. Charities are not automatically entitled to tax reliefs. According to press reports, the Cup Trust has submitted significant Gift Aid claims to HMRC in the order of £46 million. HMRC has not, as yet, agreed to pay the Cup Trust. HMRC has other means of recouping funds from a charity which has behaved inappropriately, for example, under the "non-charitable expenditure or investment rules". This could yet prove to be a very expensive exercise for the Cup Trust not to mention the individual donors who may also be prevented from claiming higher rate tax relief on their donations.

What did the Charity Commission do or not do and why?

The Charity Commission opened an inquiry into the Cup Trust but decided that it could not do anything about its activities because the Cup Trust Trust was established, on its face, for charitable purposes and had made some grants. The Commission did not think that it was in a position to take action to remove the charity from the register in those circumstances.

What could the Charity Commission have done?

Once the Commission became aware of how the Cup Trust operated, and after opening its inquiry, its powers are wide enough to permit the Commission to suspend or remove trustees and appoint new trustees. This is so even though it could not remove the Cup Trust from the Register of Charities. In this case, it would have involved removing the corporate trustee and replacing it with trustees who are resident in England and Wales who might have been more willing to expend the charity's funds on grants. Perhaps the Commission should have taken a more robust stance than it did. After all, a part of the scheme in which the Cup Trust was involved entailed disposing of assets for less than their market value to wealthy donors. Most people would consider that to be reprehensible in itself especially as the Cup Trust would, if it was to benefit from Gift Aid relief, be reliant upon the wealthy donors selling the bonds and donating the proceeds back to the charity. Accordingly the Cup Trust was taking a risk in selling assets below market value. That must be a breach of the duties of the trustee and that should have been sufficient to enable the Charity Commission to exercise its regulatory powers including the power to remove the trustee and appoint new trustees.
The Commission is, of course, in a financial straitjacket. Its budget and resources are insufficient to enable it to regulate effectively when a Cup Trust type scheme comes to their attention. The costs of doing so may not be proportionate having regard to the other 180,000 odd charities which it regulates. This is especially the case where tax avoidance or tax evasion may be involved and where HMRC can investigate and impose tax and penalties on a body which breaks the rules. That is the argument which was raised against taking action when the Commission appeared before the Public Accounts Committee.

Implications of the Cup Trust Incident

The Chair of the Public Accounts Committee was Margaret Hodge MP and she was in no mood to accept arguments from the Commission about lack of finance as a reason for not taking firm action against the Cup Trust. "Everyone bleats about cuts" she said. She also appeared to say that she didn't believe that the Charity Commission had done a thorough investigation! Other members of the Committee took the opportunity to point score by criticising the Charity Commission's refusal to register the Plymouth Brethren as a charity rather than clamping down on the Cup Trust. They were also critical of the Commission's "failure" to do due diligence on the corporate trustee before the Cup Trust was entered on the Register of Charities.

The National Audit Office has now been asked to examine whether the Commission is an effective regulator. Possible outcomes include:

  • A new legal requirement for HMRC to vet bodies before they are accepted for registration with the Charity Commission to ensure that its trustees and "fit and proper persons". This leaves the discretion entirely to HMRC who, of course, are driven by the need to increase the revenue payable to the Exchequer.
  • A new regulatory power for the Charity Commission to remove charities which appear, on balance, to be established for tax avoidance purposes rather than for charitable purposes
  • A requirement for the directors of a corporate trustee to be resident in England and Wales.

Given Mrs Hodge's attitude to the Commission's financial plight, some creative thinking could help the Commission to raise a budget sufficient to pay for the costs of proper regulation. For example, if an MPs expense claim is not approved by the independent body set up for that purpose, how about reallocating that proportion of the funds set aside for MPs expenses to the Charity Commission? Surely Mrs Hodge would not object to this if it resulted in better regulation of bodies like the Cup Trust? Given the remit of the Public Accounts Committee, its failure to identify the correlation between cuts in the Charity Commission's funding and its reduced resources with the reduction in the formal inquiries which has resulted, is quite remarkable!

This is not to say that the Commission's day to day dealings with charities is always faultless. However, in order to discharge its statutory functions, the Charity Commission has been left with little choice but to prioritise its resources and to embrace proportionality. Whilst this has resulted, on occasion, in incompetence, an over-emphasis on regulation of far less serious misdemeanours by charities and an unacceptable fall in the quality of the service delivered by the Commission to charities on matters where their help is really needed, the Commission has also had little choice but to divert its dwindling resources into dealing with the political ramifications of the "public benefit" farce which dominated its activities for a long time - passed to it so neatly by Parliament, not to mention the growing number of referrals to the Charity Tribunal. It is little wonder that the Charity Commission is reluctant to exercise its powers to remove trustees or to institute legal proceedings for the restitution of funds. The Commission probably doesn't have the funds available to defend a legal challenge to the exercise of its powers. This is a reality faced by the Charity Commission which is no doubt as frustrated as Mrs Hodge is appalled at its inability to properly regulate the sector.