The Cup Trust: The Charity Commission demonstrates a robust regulatory approach with regard to tax planning arrangements

Earlier this year, the Charity Commission (the "Commission") published the results of its inquiry into The Cup Trust, a charity which participated in a large-scale tax avoidance scheme that earned its founder £2 million in fees.

The decision is a reminder of the standards expected of charity trustees and demonstrates the Commission's wide range of regulatory powers and its willingness to use a number of them in combination to deal with a given matter, particularly where complicated and/or untested tax arrangements are involved. The Commission clarified that it does not encourage charities' involvement in such tax avoidance schemes and that "any breaches of charity law which may arise in connection with a charity's involvement in such schemes will be investigated and dealt with robustly". The results of the inquiry make clear that the Commission will now be prepared to drill down into the detail of complicated structures, including the parties involved and payment flows, to understand their real purposes and whether charity trustees have discharged their duties.For any charities considering entering into tax planning arrangements, the Charity Commission has given guidance on how trustees can help ensure they satisfy their duties. In particular, trustees must ensure:

• the arrangements are lawful;
• they have the power to enter into the arrangements;
• they are neither conflicted in any way which cannot be managed nor have the potential to benefit personally from any arrangement;
• they take and consider appropriate independent specialist advice about obtaining fiscal relief or minimising tax in the context of their responsibilities;
• a record is kept of their decision-making including any tax law, tribunal decision or professional advice upon which they are relying;
• they take into account and consider any published guidance and advice as to the lawfulness of the proposed arrangements offered or available from HMRC;
• by entering into the arrangement, that they do no expose any of the charity's property to undue risk;
• that the proposed transactions will not damage the reputation of the charity and that they have considered how the arrangement fits with the aims of the charity and the ethos of its donors and beneficiaries; and
• overall, the arrangements are in the best interests of the charity.

In practice, trustees must ensure they fully understand the structure and effects of any proposed tax planning arrangements, including the risks and any benefits conferred on private businesses or individuals. If it appears that such private benefits are the principal aim, with any benefit to the charity being a by-product of the scheme, there is a risk that entering into the scheme would not be in the charity's best interests. Trustees must also ensure that any conflicts of interest are identified, declared and properly managed. Conflicted trustees should not be involved in the relevant decision making. The Commission's decision indicates it takes a broad approach to identifying conflicts of interest, including potentially where there is a personal history and/or close relationship with an individual that stands to benefit from a proposed arrangement.

Background

The Cup Trust (the "Charity") was set up in 2009 by Mr Jenner. It had a sole corporate trustee, Mountstar (PTC) Limited ("Mountstar") which was incorporated under the laws of the British Virgin Islands. The decisions of Mountstar were taken by its directors who were, at various, Mr Jenner, Mr Mehigan and Mr Stones.

In 2010, the Charity began participating in the tax avoidance scheme (the "Scheme") which led to the Commission's inquiry. How the Scheme operated was very complex. In summary, the Charity borrowed money from a connected 3rd party which it used to buy gilts. The Charity then sold the gilts to another connected 3rd party who sold them on to "donors" for a nominal sum on the proviso that the purchaser donated the rest of the real value to the Charity plus £10. The Charity used the "donations" to repay its loan and then claimed gift aid on the donations. All the transactions happened on the same day and there were several rounds between January 2010 and November 2010. The Charity received £155,000 from the nominal payments made by donors but claimed more than £46 million in gift aid and gift aid transitional relief. Mr Jenner received over £2 million in up-front fees from his taxpayer clients for his work on the Scheme. Mr Stones received a one-off payment of £1,000 honorarium to be a director of Mountstar and there was no evidence to suggest Mr Mehigan received any direct financial award.

The Commission opened its inquiry in 2013 in light of various accounting issues identified by the Commission, ongoing concerns regarding the Charity's participation in the Scheme (including its failure to cooperate with HMRC with regard to its gift aid claims), and increasing public interest in the Charity's affairs. There had been an earlier inquiry by the Commission in 2010 due to concerns involving the Charity's apparent lack of charitable activity. The first investigation was closed on the basis that no action would be taken while HMRC considered the Charity's gift aim claims. The Charity's gift aid claims were never accepted by HMRC.

The Commission's findings

Conflicts of interest

The Commission found various individuals involved in the Scheme were known to each other, either as friends or business associates, and this gave rise to a wide range of conflicts or possible conflicts of interest. For instance:

• each of Mountstar's directors at some point in time could have benefitted financially (such as through fees, profits or continuing business) and non-financially (such as through continued enhancement of their professional standing) as a result of the Scheme's success and promotion;
• Mountstar's directors also had a conflict of loyalty by having roles in both Mountstar and the bodies involved in different parts of the Scheme.
• Mr Jenner was also managing the tax claims with HMRC for the Charity and the tax payers, whose interests were not necessarily the same.
• The Commission also considered Mr Mehigan to be potentially conflicted by his personal history and/or close professional relationship with Mr Jenner.

The Commission found that the nature, depth and breadth of the interest each director had in the Scheme and/or parties closely connected with the Scheme meant the conflicts of interests were inherent in any decision the three directors were involved in. Simply stepping aside or resigning temporarily to deal with these conflicts was insufficient. In other words, the conflicts were so inherent and the parties were so close that it was impossible the conflicts could be properly managed. The failures to identify and/or adequately manage conflicts were mismanagement in the administration of the Charity.

Other breaches of the trustee's duties

The Commission also identified additional mismanagement and/or misconduct by the Trustee's directors, including:

• Failure to take independent professional advice, or make any meaningful enquiries, for the Charity before agreeing the Charity's involvement in the Scheme.
• Causing the Charity to enter the Scheme when the directors knew, or ought to have known, that the Charity was being misused to promote private interests.
• Lack of engagement by Mr Mehigan and Mr Stones when Mr Jenner was involved. It was, for example, Mr Jenner that made all the decisions about how to deal with the HMRC's requests.
• Mr Mehigan and Mr Stones had also never met the Charity's auditors, nor did they know all the organisations involved in the Scheme including the individual who provided the loans to the Charity.
• Failure, when the Scheme started up again in June 2010, to make inquiries; to review the terms of the Scheme; to require further and proper declarations of interest form Mr Jenner as to what the conflicts were which had caused him to step aside in the first round; and to consider and decide whether to take independent advice as to renegotiation of the fees and then whether or not to negotiate them.
• No documented evidence of the directors' deliberations when they met.
• Discovery of a number of blank signed cheques which demonstrated poor financial management.
• Non-cooperation and lack of action with HMRC over a sustained period, resulting in financial penalties being incurred by the Charity, with no good explanation.

In light of the above, Mountstar's decision-making, was inadequate and fell below standards expected of competent and prudent trustees. As a result, Mountstar failed to act with reasonable care and skill and acted in breach of its legal duties to the Charity.

Actions taken by the Charity Commission

Using its powers under section 181A of the Charities (Protection and Social Investment) Act 2016, the Commission made orders disqualifying Mountstar and the individual directors from acting as trustees for a charity for a period of 15 years. The Charity was also removed from the Register of Charities pursuant to section 34(1)(b) of the Charities Act 2011 (the "Act").

Other regulatory action taken by the Commission included:

• Appointing interim managers under section 76(3)(g) of the Act.
• Issuing a "freezing order" under section 76(3)(d) of the Act, directing the trustee not to part with any property (including the charity's books and records and any property in its bank accounts) it held on behalf of the charity without the Commission's prior written approval.
• Pursuant to section 47(2)(a) and (b) of the Act, directing the interim managers and various individuals involved in the Scheme to provide the Commission with information and records.
• Pursuant to section 47(2)(c) of the Act, directing the individuals involved in the Scheme to attend the Commission's offices to give evidence about their involvement in the Scheme.

The Commission also considered using its powers of intervention under section 114 of the Act to bring claims against Mountstar and/or the individual directors for restitution. Since the charity did not suffer any actual losses, any legal claim for restitution would have been to account for profits that Mountstar and/or the individual directors may have received as a result of a breach of duty.

However, in the event, no claims for restitution were brought. As against Mountstar, the Commission decided any possible claims against it would not be viable given it had no substantial assets to satisfy a judgment. As for the individual directors of Mountstar, there were a number of factors which weighed against such a claim, including: (i) the need to establish the directors owed a duty to the Charity itself (since the general position is they owe duties as directors to Mountstar, not the Charity) or that the court would be prepared to "pierce the corporate veil" protecting the directors from liability to the Charity; (ii) that Mr Jenner was declared bankrupt; and (ii) evidential limitations and complexities due to the different legal jurisdictions, including dealing with a company subject to the law of another jurisdiction.

The Commission clarified that its decision in this case "does not mean the Commission would not bring a similar claim in other circumstances". That said, the factors above would seem to suggest that where corporate trustees are used, it may be more difficult to establish personal liability to the charity against defaulting directors of the corporate trustee.