Last year there was much furore over George Osborne's attempt to cap tax relief on giving to charity. It was claimed that tax relief on charitable giving could not be abused.
I took part in that debate and from last summer onwards have been aware of the case of the Cup Trust, which became public in the Times and Mirror yesterday whilst I was distracted by events in parliament.
The Cup Trust is enormous in charity terms. It was the 14th largest charity by income in 2011, collecting £97 million. And in two years it allocated just £135,000 of that to good causes whilst seeking to reclaim £46 million in gift aid for donors. The vast majority - about 99.98% of its income in 2011- was used to pay for fund raising costs, as the accounts show:
That is an extraordinary set of accounts and certainly unlike any other I have seen.
So too is the fact that the cost of generating the income is explained like this in the accounts:
Gilts are, of course, government bonds. Charities may buy them, of course, but you would expect to see them on the balance sheet if they did, and not as a cost of raising funds. Since gilts don't vary much in value, and certainly don't become worthless, these gilts if they were a fundraising cost must it seems have been given away by the charity as an inducement to raise funding. It's hard to interpret the accounts in any other way that I can see.
Maybe that is why H M Revenue & Customs has refused £46 million of gift aid relief on the claim made by the charity.
And that may also be why the Charity Commission has been investigating it, although without being able to take action, so far.
What seems certain is that this is a giant tax avoidance scheme, and as the Mirror points out:
It is run by advisers Anthony Mehigan and Matthew Jenner, who were behind a tax avoidance scheme used by comedian Jimmy Carr and other wealthy people.
Now that doesn't prove wrongdoing or anything like it: and the Charity Commission I stress have not found the charity doing anything illegal. But it has been denied gift aid relief so far, and until obvious questions about how a charity can spend 99.98% of its income on unusual fund raising methods that seems the right course of action on HMRC's part.
And what this also proves is that there is, unfortunately, a massive market for what looks like a tax scheme involving a charity here in the UK, which more than justified yesterday's PAC hearing.
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Now that does look like unacceptable tax avoidance, I quite agree.
I’m surprised that the Charities Commission isn’t able to revoke charitable status up front. It’d make the tax position clear right off the bat, and stop this sort of thing straight away.
But surely if the gilts are given back to donors then Gift Aid would fail because of benefits received? So they’d have to go elsewhere… so the “charity” is simply a conduit for shifting funds. It looks almost like sham, never mind not qualifying for charity relief.
As I understand it the gilts are not given back to the donors. According to reports elsewhere it seems to work like this:
http://thosebigwords.forumcommunity.net/?t=49310661&p=374019272
The bit I am not clear about is the “gift aid” element, because as I understand it that is wher the donor forgoes the tax relief in favour of the charity. I assume that they split the benefit, in the absence of other information, but am open to correction on that.
I think the gilts are given back to the donors, in effect: it’s just that the order of events is reversed so the gifts of cash apparently qualify for Gift Aid.
If you did the transactions the other way round, so the donor gave cash and then received gilts at 1% of face value, Gift Aid would clearly fail.
The crucial phrase seesm to be that you receive the benefits “in consequence of making the gift”; the argument would be that A can’t be a consequence of B if it precedes it. But I’d say that if A only happens because you’re going to do B, then A is a logical consequence of B even though it happens first.
This really can’t fly in the courts. It’s just trying to use a narrow definition of a word that is clearly intended to be used broadly.
[…] appears to know that charities can be abused for tax purposes, as I have suggested is possible this morning. I know that because last July in their GAAR […]
I do not always agree with everything you write on your blog (although it is interesting to read even if I disagree since it is no good just reading things you agree with) but these accounts are outrageous.
You may recall back in April that there was a great deal of debate when it was proposed that tax relief on charitable donations should be capped and we were told that it was preprosterous to imagine that anyone would or could use such donations for tax avoidance. I do not recall this scheme being discussed and I do not imagine it is the only one of its kind. It is an odd omission given that the facts were known to the Charities Commission before the proposal was scrapped. I wonder if the public reaction would have been different if this had formed part of the discussion?
I hoped to get this out last summer – for all sorts of reasons that did not happen
The Charities Commission should be given some real clout to go in with a sledgehammer after these people.
There is no doubt that charities have been and continue to be abused by those that are morally bankrupt.
The Vantis is an example of using charities as “stooges”.
http://www.ftadviser.com/2012/10/25/regulation/regulators/second-vantis-tax-adviser-jailed-over-m-charity-tax-fraud-46J14QSuiZp5p7y3wsUk4N/article.html
This sort of behaviour goes hand and hand with predatory capitalism.
Nothing is off limits to the unscrupulous ruthless freeloaders behind both activities as they go about their plundering activities. Wealth extraction not wealth creation is the name of the game!
Richard, apologies for the poor editing, I have now corrected my original comments:-
There is no doubt that charities have been and continue to be abused by those that are morally bankrupt.
The Vantis tax scheme was an example of using charities as “stooges”.
http://www.ftadviser.com/2012/10/25/regulation/regulators/second-vantis-tax-adviser-jailed-over-m-charity-tax-fraud-46J14QSuiZp5p7y3wsUk4N/article.html
This sort of behaviour goes hand and hand with predatory capitalism.
Nothing is off limits to the unscrupulous ruthless freeloaders behind both activities as they go about their plundering activities. Wealth extraction not wealth creation is the name of the game!
I find it very difficult to see how the main objective of this charity can be deemed to be charitable by any stretch of the imagination. If as reported in the blog linked by Fiona the Charities Commission had little alternative but to registed this tax avoidance vehicle as a charity under the current law – might I suggest that the law needs changing as a matter of urgency, and while they are doing it the Government might also wish to look at the tax break they give to the mainly well off by granting charitable status to public schools.
I think this is the problem with the “arms race” approach, so beloved of those who deny a role for moral agency. We can keep on changing the law piecemeal and we will never get where we want to be. Or we can have a general anti-tax avoidance provision, as Richard suggests, and as already exists in parts of our benefits system in different form. We can also have a similar general provision in charity law so that any vehicle which purports to be a charity can be judged on the broad effect of what it does. While we are about it we can remove the relief on charitable giving altogether, which would go some way to preventing this scam and would also remove the privilege of the wealthy to hypothecate their tax
I hope hat is something the PAC ask
Fiona – in general I agree on general tax avoidance provsions, but I would wish to counsel a bit of caution based on my experience of many East European countries where the practice, based upon the old Soviet system, is that gaps in tax legislation are open to interpretation by the legal system which is of course linked to the political system. The overall result of this is that who are in favour get the benefit of the doubt – while those who are not get penalised. It is noteworthy that Putin very often seeks to use tax avoidance as a political tool to hound his opponents. I am not saying that this is an immediate danger in the UK – but it is one I would wish to guard against.
That said I have no problem in a tax system which encourages “social goods” by incentives and punishes “social bads” by extra taxes – and to be honest I would put normal and genuine charitable giving in the first category – just like I believe that it is right to have a 0% VAT rate on books, food and childrens clothing.
@Stephen. Why do you believe that charitable giving is a social good? It does not seem clear cut to me at all. I prefer that a decent standard of living is a right for all citizens of the state, and it follows that I oppose tax incentives to “encourage” giving. Any tax foregone means that there is less for those universal entitlements, and those are the things that we should all pay a fair amount for. If someone chooses to give to charity from what is left after that obligation has beem met, that is well and good, but I prefer not to be dependent for essentials on the good will of the wealthy.
I don’t buy this line that you can’t make this or that law because bad people in the future might use it for bad purposes. Bad people will make their own bad laws.
Fiona
I still share some of the sentiment that charity shouldn’t be encouraged on the grounds that it can be used by the Government as an excuse for not doing the right thing – and given some of Cameron’s ramblings on the need to develop cahrities as an alternative to the State who can be excused fopr having such thoughts. That said with age I have become more and more dubious that the State will ever do all the things that it should – and more importantly there are genuine cases that need help now and cannot wait before the world sorts itself out. And there are a lot of genuine people, many with political views with which you and I would disagree very strongly who based on their humanity rather than their politics believe that such charitable giving is the right thing to do – I really would prefert to encourage rather than disabuse their humanitarian instincts. It is also worth pointing out that many charities now have a political element to their work which exists to point out where and how the State should be going in order to tackle our problems.
And surprise surprise it appears that Mr Mehigan used to hold a senior position in one of the Big 4 (as well as now being a Jersey resident)
http://www.accountancyage.com/aa/news/1765119/practice-kpmg-beats-e-y-tender-head-head
I wonder if Mehigan and Jenner belong to any professional bodies which have an ethical code that are worthy of such a name and that they may wish to enforce?
It is fairly common knowledge that quite a lot of people in the City make use of various schemes involving gilts in order to reduce the taxes on their bonuses – and that the HMRC are continually introducing anti-avoidance legislation to lock the stable door after the horse has bolted.
One other use that charitable structures have been put to by the financial community both here and in the US is for many of those securitisation structures that allowed them to get much borrowing off their balance sheets – and as a consequence hid many of the risk exposures that eventually crystallised and in no small part contribute to the financial crash for which we are now all paying.
@Stephen: If those “genuine people” give to charity based on their “humanity” and their belief “it is the right thing to do” then they don’t need tax breaks. They will do it anyway. The whole premise of the tax break is that they won’t do it anyway. And that rather casts doubt on their motives, wouldn’t you say?
Tax relief on charity is not neutral. The tax they do not pay is not available to the polity: and there are only two outcomes. Services we have decided to provide cost the rest of us more in tax: or those services are cut.
Whether you agree with the decisions taken by government about the level of spending on those services, or indeed the profile of public spending, does not actually change that at all. We are, at least in principle, a democracy. It is frustrating if your fellow citizens do not vote for your own priorities: but at least you have a vote. We normally accept that democracy is the best way to balance competing priorities and that we must live with some things we do not, as individuals, actually approve. That is one reason that tax is not hypothecated.
Tax relief for charitable giving removes that notion.
If you do not think that democracy will deliver “the things it should”, then perhaps you do actually wish all tax to be hypothecated. That would be a consistent position, though not one I would agree with. But if that is what you argue for it must apply to all of us. So would you agree with the idea that some element of the tax take should not go into the general fund, but rather be earmarked for a charity of our choice? How high should that proportion be? If a great many people then decide to give that part to, say, cat welfare, which of the existing services should bear the attendant cuts?
As to the question of political lobbying, I had understood that charities are not legally allowed to do that. I think that political activity is one of the things which can get a charity struck off the register, though I may be wrong about that. The principle in place is nicely summed up by one of the south american theologians when he said: If I feed the poor they call me a saint; if I ask why the poor are poor they call me a communist. What is defined as political is a whole morass in itself: but although his statement has its attractions the danger to democracy is clear, though seldom pointed up.
It is difficult to hold on to the democratic ideal in current circumstances: but to give up on it is the worst outcome I can imagine. Be careful what you wish for. The solution is not to accede to the right wing mantra that government is always and everywhere corrupt and damaging: that is the neoliberal position and they will welcome you with open arms. Is that what you want?
If those “genuine people” give to charity based on their “humanity” and their belief “it is the right thing to do” then they don’t need tax breaks. They will do it anyway.
Yes they probably will – and they will probably give as much as they always did – but it is the charity and its ultimate beneficiaries who will get less as a result of receiving less gift relief.
I have a lot of faith in democracy to get things right, but I’m afraid that the process takes time and in the meantime real people need real help. There are also things that are only supported by minorities for which achieving a democratic consensus may well be impossible or take a very long time – e.g. asylum seekers/alcoholics/drug addicts. It is perhaps also worth noting that it is often charities that point out what the State should be doing – and they are often delighted when their burden is eventually taken over by the State.
I haven’t acceded to the right wing mantra about government – I just realise where we currently are and recognise that snapping our fingers will not be enough to get us to where we want to be – you actually need a road map and democratic consent as well as idealism.
Charities can and do undertake campaigning and political activity in support of their objectives – they are just not allowed to be party political – see the details here http://www.charity-commission.gov.uk/Publications/cc9.aspx#3
People do need help and they do need it now. The way to do that is to tax at the right level and collect all of that tax. A high priority is to change the narrative that says that tax is theft; and the corollary that there is nothing shameful if you can “get away” with tax avoidance. I absolutely accept that that has been effectively promoted and that is one reason I am so admiring of TJN’s success in making people begin to question it.
It is also absolutely true that there are things which will struggle to gain public support because they are needs of a minority: though those are far fewer than you imagine and I certainly would not include any of those you list in that group. All of those are citizens and need a decent life quality because they are part of “us”. Their needs are different and that is perhaps what you are getting at: the state is best at meeting universal need. But that truth has also been subverted because how universal needs are met varies with the individual in many ways and it depends on your level of analysis. So all children need an education: but an appropriate education is not standard for all children and to achieve the aim we have to have non-standardised provision. This is a also an area where trading on ambiguities serves the neoliberal agenda well
To me charities should be there for non-essentials only. Again there are problems, because what is essential for full participation in our society changes over time: and no doubt there will be lag, as you say. Nonetheless the picture you paint of charities delighted when their burden is passed to the state seems to me to be anachronistic. Charities are not like that any more: or many are not. Many are dependent on government for their funding and the usual consequences follow: they are no longer free to speak truth to power.
The tax relief is only a minor part of that subversion but it does support the idea that if only we were taxed less we could do more and better things: that narrative pops up in many ways, overt and subtle: this is one of them.
As you said, we need a road map: and my preferred route includes a bypass on this relief