The Charity Commission has concluded a five-year investigation into The Cup Trust, a charity involved in a complex tax avoidance scheme worth £46m, having found ‘clear mismanagement and misconduct’ on the part of sole trustee Mountstar
The Cup Trust was a registered charity established in the British Virgin Islands with a sole corporate trustee, Mountstar Ltd. It was used as a large-scale tax avoidance scheme, taking donations which it used to purchase government bonds, known as gilts.
Using borrowed money, the charity purchased gilts from a company called Romangate, which were then sold to third-party UK taxpayers for a nominal sum of £5 per £50,000 of gilt value ‘with a call option to ensure the Charity eventually secured the market value of the gilts through the receipt of the related “donation” or by the return of the securities’.
Between January 2010 and November 2010, the charity organised 10 rounds of gilt purchases, ‘constituting approximately 826 transactions and involving over 360 donors’, totalling £176m.
The charity then made claims for Gift Aid of a total value of £46m but donated only £55,000 to good causes.
The Charity Commission investigated the charity and Mountstar, including the three sole directors Matthew Jenner, Darren Stones and John Mehigan, noting that ‘it was necessary for the Inquiry to look into the relationships between the directors of Mountstar and the various parties involved in the scheme’.
It found that ‘various individuals involved in the scheme were known to each other, either as friends or business associates’ and all three directors of Mounstar ‘were all involved as directors and/or company secretary at some point in the company Romangate’.
It added that ‘each director of Mountstar would have had access to information about the charity that might have been useful to the bodies involved in in different parts of the scheme which they were involved in’.
From this the Commission determined that, ‘Given the directors’ individual involvement in different third parties connected to and in some cases pivotal to the scheme, it is difficult to see how any of them could make decisions for the trustee in a way that ensured the trustee complied with its legal fiduciary duties under charity law.’
On mismanagement of the charity, the report stated: ‘During the course of the Inquiry’s investigation, it identified additional mismanagement and/or misconduct by the Trustee in the administration of the Charity, including discovery of a number of blank, but signed, cheques by the Interim Managers.
'The Inquiry formed the view that the interviews and further information and documents obtained after the Tribunal’s decision in 2013 supported the Tribunal’s initial confirmation of evidence of misconduct and/or mismanagement.
‘The Inquiry established that the decision making of Mountstar and its directors when taking decisions in the affairs of the Charity was poor.
‘The directors did not act prudently or proactively enough to identify and assess the implications, benefits and risks for the Charity in entering the Scheme.
‘The directors individually and collectively failed to take independent professional advice for the Charity, instead relying on that provided by the promoter of the Scheme obtained for the tax payers.
‘That advice was never going to be independent or suitable for the Charity and its interests as a charity that has to comply with charity law.'
The report concludes that Mountstar was responsible for ‘clear misconduct and mismanagement’ and failed to fulfil its legal duties as trustee in entering the charity into the scheme and managing its participation in the scheme. These conflicts of interest were ‘serious and substantial’.
However, the Commission also found that the inquiry ‘did not identify fees to Mountstar that would amount to unauthorised trustee benefit’. One of its directors profited from ‘at least £2m in fees and/or commission’.
The charity was first investigated by the Commission in 2010 following reports that the charity was being used as a tax avoidance scheme. A statutory inquiry was launched in 2013 after Mountstar failed to provide sufficient information to HMRC, and the Commission appointed an interim manager to take over decision-making at the charity.
The complexity of the charity and several legal challenges led to the publishing of the report being delayed for five years.
The publication of the final investigations report follows the disqualification of Mountstar (PTC) from being a charity trustee for a period of 15 years, effective 30 August 2017, until the year 2032. The Commission made the order under section 181A of the Charities (Protection and Social Investment) Act 2016 in May 2017.
The Commission report stated: 'Mountstar acted by the agency of its directors who bear individual and collective responsibility for its governance and its decisions, actions and inactions as corporate trustee of the Charity. The Inquiry considered and made separate decisions to disqualify each of the three directors of Mountstar from being charity trustees or trustees for a charity.'
On 18 July 2017, the Commission made orders under s181A of the Act to disqualify Matthew Jenner and Stones, as two of the directors of Mountstar, from acting as charity trustees or trustees for a charity for a period of 15 years. The orders came into effect on 30 August 2017.
The Commission also issued a s181A disqualification order to the third director of Mountstar, former ICAEW member John Anthony Mehigan on 24 August 2017 after consideration of representations against his proposed disqualification. Mehigan did not appeal the order to the Tribunal and the order disqualifying him came into effect on 5 October 2017.
Although the inquiry accepted that Mehigan and Stones ‘received very little directly from the Scheme. Mr Mehigan and Mr Stones in the Inquiry’s view did not deal adequately with conflicts of interest’, both were barred from being charity trustees for 15 years from 2017.
Back in June 2017, Mehigan was also banned for 10 years and fined £70,000 by the Financial Reporting Council (FRC) for his role in the Cup Trust charity, while auditors Hillier Hopkins were also given fines and reprimands by the audit regulator.
Misuse of Cup Trust
Harvey Grenville, head of investigations at the Charity Commission, said: ‘Our inquiry demonstrates beyond doubt that The Cup Trust was misused by the corporate trustee to assist higher-rate tax payers in reducing their tax bills, and earning individuals connected to the scheme lucrative fees.
‘Those personal benefits were far more than incidental and the fact that the charity would, had the scheme been accepted by HMRC, have benefited from gift aid, does not legitimise these intentions or actions.
‘Charities rely on the public’s goodwill in supporting tax benefits designed to encourage genuine charitable donations. It is right that we take robust regulatory action where trustees’ actions abuse that goodwill.
‘It is clear that this charity, through its involvement in an attempted tax avoidance scheme, undermined public trust in charity generally.
‘The Commission has learnt from this case: over recent years, we have significantly strengthened our approach to identifying and dealing with risks facing charities, have improved our pre- and post-registration processes and are more proactive and robust in using our legal powers to ensure trustees comply with their legal duties and responsibilities.
‘We have also successfully called for our legal powers to be strengthened to help us better disrupt and stop the abuse and mismanagement of charities. Some of the new powers we asked for and are using are as a direct result of this case.’
Charity Commission Decision: The Cup Trust inquiry results (formerly a registered charity), issued 18 January 2019 https://www.gov.uk/government/publications/the-cup-trust-charity-commission-inquiry-results/the-cup-trust-inquiry-results-formerly-a-registered-charity
Report by James Bunney, Sara White