Charity raised £176m, good causes got £55,000

From The Times - http://www.thetimes.co.uk/tto/money/tax/article3673519.ece

One of Britain’s biggest charities is a front for tax avoidance, The Times can reveal.

Wealthy donors used the Cup Trust to avoid £46 million in tax in an extensive abuse of Gift Aid incentives designed to encourage charitable donations.

The registered charity raised £176 million between 2010 and 2011. In 2010 it attracted more donations than the Royal Society for the Protection of Birds, the British Heart Foundation or the Salvation Army.

But instead of using the money for its stated objective, to “improve the lives of young children and adults”, it carried out trades that artificially generated Gift Aid for donors to reduce their tax bills. Investors who “donated” £1 million to the Cup Trust, for example, would receive most of their money back — but still be entitled to claim Gift Aid worth between £250,000 and £375,000.

“Of all the tax avoidance schemes I have come across, this is perhaps the worst,” Margaret Hodge, chairwoman of the Public Accounts Committee, said. “I thought I was past being shocked, but this genuinely has shocked me.

“To exploit a mechanism designed to encourage charitable giving in order to avoid tax is just disgusting. The Charity Commission certainly has questions to answer about how such flagrant abuse was allowed to occur.”

The Cup Trust is only one of several tax schemes on the market that manipulate charity law, The Times has learnt. George Osborne, the Chancellor, introduced a cap of £50,000 on charitable tax relief last year after identifying widespread abuse. But an outcry from philanthropists persuaded the Government to change its mind.

“A lot of people thought Osborne was excessive, but this case just proves that something needs to be done,” John Hemming, chairman of the Charity Tax Group, said. “The public will mistrust charities when this sort of activity is undertaken. It’s up to the authorities to stop this.”

Charity experts questioned yesterday how the Charity Commissiongave the Cup Trust a clean bill of health, despite a two-year investigation into its “governance and activities.”

The regulator, which has had its budget cut by a third, failed to take action despite the charity’s accounts disclosing that it was controlled by Matthew Jenner, the boss of NT Advisors, a well-known tax avoidance firm whose initials stand for “No Tax”.

“The commission were and are wholly unable to tackle this huge abuse of the charitable sector,” one former Charity Commission employee said. “Usually they have one accountant spread across many, many cases with limited investigative time or ability to obtain documents.”

The Revenue admits it is “well aware” that many tax avoidance schemes involve Gift Aid, introduced in 1990 to allow charities to claim tax relief on all donations. Donors paying the higher 40 or 50 per cent rates of tax can also claim Gift Aid to reduce their tax bill to the basic rate of 20 per cent.

Mr Jenner exploited these rules by arranging for the Cup Trust to purchase huge yearly quantities of gilts, or government bonds. It is understood that the gilts were sold for a minimal sum via third parties to investors, who then sold them at market value and “donated” the proceeds to the Cup Trust.

The end result of the complex transaction was that investors could generate large Gift Aid claims that could shelter other income simply by paying fees to NT Advisors and making a nominal donation to charitable causes.

The Cup Trust made sure that it donated this nominal amount to other charities to fulfil its “charitable objective”. In 2010, a payment of £55,000, representing 0.03 per cent of the total donations, was transferred to six unnamed “UK registered charities”.

Other NT Advisors schemes have attracted hundreds of high-net worth investors including the BBC presenter Chris Moyles and the comedian Jimmy Carr, who was exposed by The Times last year for investing millions of pounds in an aggressive tax avoidance scheme called K2. There is no suggestion, however, that these individuals invested in the Cup Trust, “The Cup Trust is a scheme which appears to function simply as a mechanism for deriving tax relief based on the Gift Aid legislation,” Alastair McEwan, of Rebus Investment Solutions, said.

“The scheme itself is designed to generate significant Gift Aid, in the region of £46.4 million, despite the fact that very little of the money is actually being used for any charitable benefit.”

Another person, with knowledge of the scheme, said: “It was a tax planning strategy to mitigate higher-rate income with no economic loss to the individual.

“There is a ‘donation’ per client. But obviously there is a mismatch between the amount the individual claims and the amount the charity gets in its hands.”

It is understood that legal changes will now prevent the Cup Trust from raising future funds, but will not affect claims already made for tax relief. It is not known whether HMRC has disputed these.