High Court rules Cup Trust Gift Aid claim can be withdrawn

April 25, 2016 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: Canadian Charity Law, Using Intermediaries in Canada

In the Cup Trust case there was an abusive scheme run by a charity and controlled by a trustee, Mountstar.  The Mountstar trustee was replaced by an interim manager appointed to take over the affairs of the charity.  The interim manager decided that they did not want to pursue litigation relating to a Gift Aid claim.  The organizers of the scheme (Mountstar) wanted the charity to continue litigation and were prepared to pay for its costs.  The High Court in the UK decided that charities should not be involved in speculative litigation and that it was acceptable for the interim manager to withdraw the Gift Aid claim.  

Here is a link to the England and Wales High Court (Chancery Division) Decision The Charity Commission for England and Wales v Mountstar (PTC) Ltd [2016] EWHC 876 (Ch) (21 April 2016).  Here is a PDF of the The Charity Commission for England and Wales v Mountstar (PTC) Ltd decision.

There is an interesting note in paragraph 34 about whether a charity can appeal a claim when the likelihood of success is negligible:

34. Mr. Furness indicated that from a purely commercial perspective, the large Gift Aid sum that might be recovered (£46m) compared with the likely costs (£200,000) might make an appeal seem “a good bet, even though the odds are very long”.  However, he continued,

“Although a commercial organisation with money to spare might think the claim “worth a punt”, charity trustees, with their duty to apply their assets prudently, could legitimately consider it inappropriate to put at risk a substantial amount of charity money on what is really no more than speculation at long odds.

Of course in the present case the considerations aired in the previous paragraph are academic, because this charity does not have £200,000 to spend on the litigation - its assets total only £20,000.  This means that if the appeal is to be pursued it must be financed by a third party.”

The case discussed the duty of trustees to only invest funds at the standard of a prudent business person:

53.                  The parties were agreed that the general duty of care which applies to trustees of a charity, and to interim managers appointed and authorised to exercise the powers of the trustees of the charity to the exclusion of the trustees, is a duty to take the care of “an ordinary prudent man of business … acting in the management of his own affairs”: see e.g. Speight v Gaunt (1883) LR 9 App Cas 1 at 19.  In addition, there was no dispute that a trustee does not  have the same freedom to speculate with the trust assets as a businessman might do with his own assets.  In Learoyd v. Whiteley (1887) 12 App Cas 727 at 733 Lord Watson said,

“[A trustee] is not allowed the same discretion in investing the moneys of the trust as if he were a person sui juris dealing with his own estate. Business men of ordinary prudence may, and frequently do, select investments which are more or less of a speculative character; but it is the duty of a trustee to confine himself to the class of investments which are permitted by the trust, and likewise to avoid all investments of that class which are attended with hazard”.

Here is the press release from the Charity Commission of England and Wales:

Charity regulator welcomes High Court decision permitting withdrawal of £46 million tax claim.

The Charity Commission, the independent regulator of charities in England and Wales, has welcomed today’s High Court decision on the use of a charity in tax avoidance. The ruling, subject to any appeal, permits The Cup Trust charity to withdraw its £46 million tax claim.

The commission was concerned that the public trust in charities would be undermined if this charity was required to continue with its tax avoidance claim. By asking the court to hear the issue, rather than taking the decision itself, the commission was free to make arguments based on its objective of promoting public trust and confidence in charities.

In his judgment today, Mr Justice Snowden confirmed that the commission was justified in bringing this issue to the High Court, and agreed with the commission that the interim managers were entitled to withdraw the charity’s tax claim, following advice from a leading tax barrister that the claim had a negligible chance of succeeding.

The case had been opposed by Mountstar (PTC) Limited, the charity’s trustee which is a private trust company incorporated in the British Virgin Islands. Mountstar had, through its director, offered to pay for the charity to bring the tax litigation, but the court confirmed that the interim managers were entitled to reject this offer. The judge agreed the interim managers were right to be concerned about the offer, and justified in questioning the motives behind it.

The commission particularly welcomes the court’s confirmation that, because of their duty to apply charitable assets prudently, charity trustees do not have the freedom to ‘take a punt’ on speculative tax litigation, even if the charity has enough money to pay for it.

Chris Willis Pickup, Head of Litigation at the Charity Commission, said:

Today’s judgment is good news for charities and for the public who support them. The public can be confident that charities will not be used improperly as part of tax avoidance schemes, and charity trustees should welcome the court’s clear guidance on their legal duties in tax litigation. The court has accepted the commission’s approach in the case and dismissed the arguments of those who sought to use a charity for tax avoidance.

Cases like this will strengthen public trust and confidence in charities, as they show the donating public that we will take action to tackle abuse. The vast majority of charities serve their beneficiaries but action will be taken against the few who abuse the privilege of charitable status.

This decision is the latest step in the commission’s work to challenge the use of The Cup Trust in tax avoidance, following the opening of a formal investigation and the appointment of interim managers to the charity. The commission will now continue with its investigation and will report its findings once this is concluded.

Background

The Cup Trust was created on 10 March 2009 and registered as a charity on 7 April 2009. Its sole trustee is Mountstar (PTC) Limited, a private trust company incorporated under the laws of the British Virgin Islands.

The commission opened a formal investigation into The Cup Trust on 12 April 2013, following allegations that the charity was established to further the avoidance of tax with only minimal sums given to charitable causes. The donors received almost all of their money back while benefiting from the Gift Aid scheme.

Shortly afterwards, the commission appointed an interim manager to the charity, to take over the powers and duties of the charity’s trustee. The trustee challenged this appointment in the First-tier Tribunal (Charity), which emphatically rejected the challenge and upheld the commission’s decision in a detailed ruling of 17 October 2013.

The commission brought this case to the High Court to seek approval of the interim managers’ decision to withdraw the charity’s claim of £46 million in Gift Aid tax relief. This claim had been made by the trustee before the commission’s intervention.

The case was brought using the commission’s power in section 78(5)(b) of the Charities Act 2011, and is the second time the commission used this power, following The Dove Trust case in 2014.

In a press summary from the Charity Tribunal a few years ago it provides some basic information on the Cup Trust and the Charity Commission's handling of the matter: 

3. The background is that the Charity, acting by its sole corporate trustee Mountstar, had adopted a fundraising scheme in 2010 which purported to generate over £176 million in donations from higher rate taxpayers, enabling the Charity to claim £46 million in gift aid from HMRC and the donors £55 million in higher rate tax relief (“the Scheme”). The gift aid and higher rate tax relief claims are presently subject to scrutiny by HMRC.

5. Owing to concerns about the Scheme, the Commission (the statutory body responsible for regulating charities) opened a non‐statutory investigation into the Charity in March 2010 which it closed in March 2012 principally because it concluded that the tax efficiency of the Scheme fell within the remit of HMRC, not the Commission. It was therefore decided to await the outcome of the gift aid claims which the Charity had made to HMRC before re‐engaging with the Charity unless new concerns arose about the Charity in the meantime.  ...

11. The Tribunal found that the Commission had fallen into error in not being prepared to consider those questions in 2010 and 2013 for the stated reason that the tax efficiency of the Scheme was for HMRC not the Commission to determine. Whilst the Tribunal agreed that it is not within the remit of the Commission to adjudicate upon the tax efficiency of the Scheme, it found that it is within the Commission’s remit and is its duty as regulator of charities to inquire into and determine whether a charity trustee in adopting a fundraising scheme such as the Scheme has acted as an ordinary prudent man of business. This requires a rigorous and vigorous investigation by the Commission into the Scheme and its participants within the context of the gift aid legislation. That the Commission had not done.

In other words a charity regulator that is not part of the tax collection arm of government should still take into account that a "fundraising" scheme or abusive charity avoidance scheme is prudent and appropriate for a charity to undertake.  

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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