Charity involved in large tax evasion scheme in the UK – The Cup Trust: CCEW Inquiry

Background

In 2010, a charity registered by the CCEW of England and Wales (CCEW) named ‘The Cup Trust’ (charity) was embroiled in a tax avoidance scheme and attracted media attention. After a series of investigations, reports and litigation, The Cup Trust was removed from the UK register of charities on 26 May 2017. There was considerable media coverage in the UK on both the tax avoidance and the failure for the UK CCEW to have taken steps sooner.

The scheme

The scheme was devised and promoted by entities which were controlled or were controlled by associates of Matthew Jenner. Matthew Jenner was a tax advisor and a director of Mountstar PTC Ltd (Mountstar). Mounstar was a private trust company in the British Virgin Islands and was the sole corporate trustee of the charity.

The scheme operated in the following way:

• the charity would purchase securities at full value with money borrowed from a foreign-based lender;
• the charity then sold the securities to an intermediary company at a 0.01% of the full value;
• the intermediary company would then sell these securities to a UK-based tax payer for 0.02% of the full value;
• the UK-based tax payer then sold those securities back to the party the charity had originally purchased the security from at full value;
• the UK-based tax payer donated the net proceeds plus small amount (0.02%) to the charity (which the tax payer could claim as a tax deduction); and
• the charity would then repay the loan to the foreign-based lender and would receive a 0.02% windfall.

This process was undertaken virtually simultaneously on the same day and could be repeated multiple times a day. In total, there were 826 transactions involving 300-400 taxpayers with over 176 million pounds of securities being bought.

This process allowed:

• the tax-payer to reduce their tax liability while expending a fraction of the funds; and
• the charity to receive a small profit and ‘gift aid’ relief from Her Majesty’s Revenue and Customs (HMRC). However, this was not accepted by HMRC, we discuss this further below.

The charity

The Charity had previously indicated that it was separate from the creation of the Scheme and that the Charity had taken part in the scheme as a form of fundraising for its own charitable purposes.

The Charity had entered into an arrangement with the intermediary company to provide it with a large portion of their ‘gift aid’ relief claim if it was successful. If the scheme had been successful, the Charity would have received 46 million pounds from the HMRC. It would have been required to pay 7.8 million pounds to the intermediary.

The fallout

The HMRC rejected the ‘gift aid’ relief claim made by the charity in December 2013. The HMRC contended that the payments by the taxpayers did not amount to a qualifying donation under the UK’s Tax Act.

Upon information received from HMRC, the CCEW investigated the operations of the Charity in 2010, within seven weeks of the first ’round’ of transactions. At this point, the CCEW identified various areas of regulatory concern, including:

• the administration, governance and management of the charity;
• the protection of the property of the charity (including reputation);
• application of the funds;
• identification and management of risks; and
• Mountstar’s compliance with its duties and responsibilities as charity trustee (particularly in relation to the management of conflicts of interest).

The investigation was closed on 7 March 2012 because the CCEW took the view that it could not deregister the Charity. It had been established for charitable purposes and it was not for the CCEW to find fault with the scheme. The CCEW suggested, this obligation lay with HMRC. The CCEW only issued guidance for Mountstar as to the management and recoding of conflicts of interest.

On a hearing of the matter in December 2013. a Tribunal was underwhelmed by the CCEW’s position, and made a highly critical decision. Its decision was widely supported and commented upon in the media. This led to questions being raised by the UK Parliament and the community, as to the effectiveness of the CCEW as a regulator.

On its initial investigation, the Commission had found that:

• the charity and the trustee was clearly a tax evasion scheme;
• that both the charity and the trustee were established on paper for charitable purposes (for the purposes of legal meaning in the UK).
• The fact that it served as a tax evasion vehicle for the very rich was not a matter with its within its remit.

The Commission used predefined checklists to reach this decision. It concluded that the conflicts of interest within the Charity had been managed because the Charity had responded to its questions (by its only remaining director) and had a conflicts of interest policy. This approach was the subject of much criticism.

The Commission further explained its position:

“Under charity law, a charity is an institution which is established for charitable purposes only, and which is subject to the charity law jurisdiction of the High Court. The Commission must register any charity which applies for, and meets the legal requirements for, registration. It cannot turn down an organisation for registration if it meets the requirements for registration even though there may be concerns about its management or governance. The purposes of an organisation will in most cases be set out in the legal document which establishes it, which in the case of the Charity was a trust deed. The purposes of an organisation are not the same as the motives of those who establish it, or the activities which it carries out. In other words it is possible for someone to create a charity with the intention of using that charity to do particular things other than furthering the charity’s purposes – that does not necessarily mean that it is not a charity…

…In the case of The Cup Trust, the purposes expressed by the governing document were unequivocal, so there was no scope for the Court and consequently the Commission to take either the motive of those setting up the trust or its activities to determine its charitable status in law. If however, a charity carries out activities which are not permitted, that may be a breach of trust for which trustees may be accountable. However, that in itself could not be a reason to conclude that The Cup Trust was not and never was a charity in law. In consequence, it The Cup Trust was properly registerable as a charity at that time on the information known, notwithstanding its later activities in relation to the participation in the Scheme and the wider benefits which might flow to the individual taxpayers in relation to the Scheme. This position was confirmed by independent counsel instructed by the Commission. The Tribunal also subsequently accepted that it was a charity.”

This position was the very one which was criticised so heavily by the Tribunal, the government, the media and the wider community.

The Commission has subsequently changed its registration processes to ensure that there is now robust post-registration monitoring of charities where there are concerns, or where the Commission has required certain actions at or in connection with registration.

Subsequent Reform

The UK government’s response was to enact a new law concerning fundraising by charities. The changes were introduced in the fundraising section of the Charities (Protection and Social Investment) Act. These sections were directed at helping charities to demonstrate their commitment to protecting donors and the public, including vulnerable people, from poor fundraising practices.

There are now 2 new requirements for fundraising in the UK:

1. where charity uses a professional fundraiser to raise funds, any compulsory written agreements between charities and these third parties must include extra information covering:
   • the scheme for regulating fundraising or recognised fundraising standards that will apply to the professional fundraise in carrying out the agreement;
   • how the professional fundraiser will protect the public from unreasonably intrusive or persistent fundraising approaches and undue pressure to donate; and
   • how charities will monitor the professional fundraiser compliance with these standards.
2. If charity is required to have their accounts audited, they must include extra information about fundraising in their trustees’ annual report. The extra annual statements should include information about:

• • the charity’s approach to fundraising;
  • work with, and oversight of, any professional fundraisers;
  • fundraising conforming to recognised standards;
  • handling of fundraising complaints; and
  • protection of the public from unreasonably intrusive or persistent fundraising approaches, and undue pressure to donate.

Conclusion

Similar to the process undertaken in Australia when a charity is established, the CCEW (the ACNC in Australia’s case) may only have the governing documents of the organisation to take into account. This is because many organisations will not undertake any ‘activities’ before being registered as a charity.

The charitable purposes expressed in the governing documents of The Cup Trust were charitable which is all the CCEW had to review at the point of registration.

However, we find surprising the statement of the CCEW that:

In the case of The Cup Trust, the purposes expressed by the governing document were unequivocal, so there was no scope for the Court and consequently the Commission to take either the motive of those setting up the trust or its activities to determine its charitable status in law.

While the initial and primary point of investigation for determining an entity’s purposes is the governing documents and there were no activities to review at registration, the CCEW had been made aware of the activities of the charity by the HMRC at a later date. The activities clearly demonstrate that a primary purpose of the organisation was to create a private benefit through a reduction of private citizens tax liabilities.