Charities watchdog under fire over tax avoidance scandal ‘failed to stop abuse of system’

Commission’s failure to stop abuse of system by Cup Trust branded ‘unacceptable’ by MPs

The charities watchdog faces an inquiry to judge if it is “fit for purpose”, following a withering report into its handling of a charity trust that generated £176m income but only gave £55,000 in donations in a suspected abuse of the Gift Aid system.

The Cup Trust, which grew from nothing to one of Britain’s largest charities within a year, is now under investigation as a tax-avoidance scheme.

The Charity Commission will be scrutinised by the House of Commons Public Accounts Committee after serious shortcomings were identified in the way it granted the Cup Trust legal charitable status. The trust, for “children and young adults”, and controlled by a single corporate trustee based in the British Virgin Islands (BVI) tax haven, generated an income of £176m after it was registered in 2009 – making it Britain’s 14th-largest charity – but only made £55,000 in donations.

The commission, chaired by William Shawcross, launched a statutory inquiry last month into the Cup Trust after Mr Shawcross admitted its previous attempts to scrutinise the body had been a “disaster”.

But MPs lambasted the watchdog for what they said was the “unacceptable” decision to grant the Cup Trust charitable status in the first place and stop its “abuse” of the charities system. The committee also said the Cup Trust case was symptomatic of a wider “lack of rigour” in enforcement and noted that five reviews in the last 25 years by MPs and the National Audit Office had found “severe shortcomings” in the commission’s work. HM Revenue & Customs, which has also looked into the Cup Trust, told the select committee that it was aware of eight other similar schemes.

Margaret Hodge, the Labour chairwoman of the committee, said the commission had failed to ask “elementary” questions which would have revealed close links between the Cup Trust’s BVI trustee, Mountstar Ltd, and London-based NT Advisors, a tax avoidance specialist. NT Advisors was behind a separate tax avoidance scheme used by the comedian Jimmy Carr.

Mrs Hodge said: “My committee does not believe the Cup Trust ever met the legal criteria to qualify as a registered charity. Its purpose was to avoid UK tax. “Despite its staggering level of ‘income’, the trust has only ever given the paltry sum of £55,000 to charitable causes. Any good this did was far outweighed by the potential loss from tax avoidance.”

The Cup Trust is being investigated because of its attempts to reclaim some £46m from the public purse under Gift Aid provisions which make charitable donations tax free. None of the £46m has been paid by HMRC.

Following its foundation, the trust invested heavily in government bonds, spending its cash pot of £176m. It then sold the bonds for £17,000 – a fraction of their original price – to its “donors”, who in turn sold them back to the trust for the original cost price while claiming tax relief. Tax avoidance is legal but MPs strongly criticised the commission for allowing the trust to be granted charity status without first establishing that its purpose would be “exclusively charitable”.

The MPs said they felt it necessary to order “yet another” investigation into the watchdog to ask “whether it is fit for purpose”. Mrs Hodge said: “The commission’s approach to regulation and enforcement lacks rigour.”

The commission said it was looking at ways improve its co-operation with the HMRC. It added: “We are targeting our resources on the areas of highest risk, with a particular emphasis on tackling fraud, terrorist abuse and risks to vulnerable beneficiaries.”