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  1. Wealth
January 31, 2013updated 10 May 2016 6:21am

The Cup Trust Scandal Reveals Buck-Passing and Damages Philanthropy

By Spear's

‘It was clearly a dodgy operation. No donor worth their salt would have given their hard-earned cash to the Cup Trust’

The Times broke the story this morning that a large UK charity, the Cup Trust, has been used as a front for wealthy donors to avoid £46 million in tax. A philanthropy adviser Spear’s has spoken to says it’s a surprise anyone took the Cup Trust seriously in the first place, and an exercise in bureaucratic buck-passing is now taking place.

The philanthropy adviser said all serious donors – those not interested in tax relief – should have been suspicious: ‘It was clearly a dodgy operation. No donor worth their salt would have given their hard-earned cash to the Cup Trust.’

A quick visit to their website confirms why: consisting of a single page containing a few lines of text, it informs visitors that it is registered with the Charity Commission and that it is ‘a UK based charity that seeks to raise funds to enable us to make grants to other UK based registered charities.’ This impossible vagueness should have been a warning sign to the Charity Commission.

But the Charity Commission seems intent on passing the buck, as do HMRC, both of whom should have spotted that there were irregularities.

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The Cup Trust, which is registered with the Charity Commission, carried out trades that enabled donors to reduce their tax bills by claiming Gift Aid. The charity purchased large quantities of government bonds and then sold them, via third parties, to investors for small sums.

The investors sold the bonds at market value, and donated the proceeds to the Cup Trust, making huge Gift Aid claims in doing so. Notional donations, representing a tiny percentage of the sums generated by these transactions, actually went to furthering the charity’s supposed aim of ‘improving the lives of young children and adults’.

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It is remarkable that neither HMRC nor the Charity Commission picked up on this large-scale abuse of Gift Aid, and clarity is needed as to how it escaped the notice of both bodies.
WE MIGHT, HOWEVER, be waiting some time for such clarity. The Charity Commission are refusing to put anyone forward to comment on the Cup Trust story, and instead have released a statement in which they describe the charity as an ‘unusual charitable structure’ that had not actually broken any laws. ‘Tax matters remain a matter for HMRC,’ the statement concludes.

Quite how the Charity Commission didn’t think that a charity that gave out a grand total of 0.03 per cent of its total donations was worth investigating is a mystery, especially since it states on its website that ‘the Charity Commission regulates the administration and affairs of all registered charities.’

When contacted, HMRC said they were ‘legally prohibited’ from making a comment on the story, but a spokesperson in the press office told me that this was really a matter for the Treasury to deal with. Is anyone going to take responsibility?

Read more: Busting five common myths about philanthropy

While the matter of culpability is decided, many will be concerned about the reputational damage that the exposure will cause the third sector. But these concerns are misplaced, says one expert. ‘There is no good reason at all,’ says philanthropy consultant Theresa Lloyd, ‘for donors not to continue trusting the charities they support. The vast majority of charities and donors are not dodgy.’

The story also reopens the debate about a tax cap on philanthropic giving. Last spring, the government caused outrage among philanthropists and charities when it announced a cap of £50,000 or 25 per cent of income – whichever was higher – on the amount of income tax relief that could be claimed on charitable donations.

Spear’s campaigned against this from the moment it was announced, and applauded the government’s U-turn in May, when George Osborne said the cap would be removed due to widespread objection.

Now there is a danger that the nefarious activities of Cup Trust’s ‘donors’ will induce the government to think once again about introducing a cap – which would be bad news for both charities and donors alike.

Update: Statement from the Charity Commission

This is an abridged version of a statement the Charity Commission sent Spear’s; it only serves to show weak the body is:

‘We are not comfortable with the charity’s set up [and] it was precisely because we had serious concerns about the charity’s structure and activity that we investigated the Cup Trust.

‘We opened an investigation into the charity in March 2010 following concerns raised about its governance, its activities and how its funds were raised and applied. We seriously considered whether or not it was a charity and whether it should be removed from the register. But whatever the motives for creating the Cup Trust, we were forced to conclude that we could not remove it, as the Cup Trust is legally structured as a charity.

‘We cannot take action against a charity unless we are able to demonstrate that its trustees have breached their legal duties. Nor can we take action against a charity simply on the basis that it spends a relatively small proportion of its income on charitable activities in any given year. It is for trustees to decide how to apply their charities’ funds. Most trustees make these decisions well and in the best interests of their beneficiaries.’

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