It is amazing to see the speed at which changes have happened in the UK as a result of one problematic charity. The charity named Cup Trust involved a claim from the UK Gift Aid program of £46 million and only £55,000 was spent on charitable activities. However, by Canadian standards that is chump change. In Canada we have had about $6 billion in what CRA calls “abusive charity gifting tax schemes” and probably a billion or two in other problematic receipting over the last 8 years and we have seen over that period small amounts of incremental change to prevent the abuse of charities. In the UK as a result of the Cup Trust scheme the Charity Commission will tighten its application process. “The Commission works closely with HMRC, and is developing a joint portal to apply simultaneously for registration as a charity with the Charity Commission and recognition as a “charity for tax purposes” by HMRC.” According to the Charity Commission “The proposed system will maintain independent decision making by the two authorities, but will allow them to work more closely together.” The Charity Commission has also asked for more power to prevent directors from serving on charities.
The Charity Commission in a press release noted “... I accept that we have sometimes been too reticent in using our powers during investigations and that we must address this. We have often given trustees too many chances to put things right before taking action. We have also been clear that we need stronger powers to deal with the most serious cases of abuse in charities. For example, we have used the opportunities presented by Lord Hodgson’s review of the Charities Act and the Law Commission’s charity law project to ask for a general power of disqualification. Such a power would improve our ability to disqualify individuals whom we suspect of wrong doing from acting as trustees. Too often, we see trustees resigning when we start the process of removing them, meaning that they are free to act as trustees for another charity. A general power of disqualification would allow us to stop that from happening. We are also taking a much tougher approach to charities that have repeatedly failed to file accounts with us. We are urging all charities that are currently in default to file their accounts immediately.” This sounds to me like a much stronger version of the “ineligible individual” concept in the Canadian Income Tax Act.
I have a number of concerns. The Charity Commission is recognized around the world as one of the best regulators of charities. The UK government wants better regulation of charities but cut the Commission budget by a 1/3 a couple of years back. Really smart! Also while there has been a strong reaction to one abusive scheme it is important that the UK government and the Charity Commission not overreact and carefully consider each of the changes and how they will affect the broader sector.
Here is the UK Treasury Minutes with the Government responses to the Committee of Public Accounts.
Cup Trust and tax avoidance
The Charity Commission (the Commission) registers and regulates around 160,000 charities in England and Wales, with 20-25 organisations seeking to register as new charities every day. The Commission decides whether to register organisations as charitable according to their stated purposes. If an organisation’s purposes are exclusively charitable and those purposes are in the public benefit then they qualify as charities under the Charities Act 2011.
The Cup Trust (the Trust) was established by trust deed in March 2009 and the Commission registered it as a charity in April 2009. The Trust has a single trustee, a company called Mountstar, registered in the British Virgin Islands. The Trust operated in the following way:
• The Trust purchased £176 million of government gilts and sold them to ‘donors’ for only £17,000.
• The ‘donors’ sold the gilts, donated proceeds roughly equal to the cost of purchase back to the Trust, and could claim tax relief for the donation if they were higher rate taxpayers.
• The Trust claimed Gift Aid of £46 million from HMRC on these donations.
• The Trust donated only £55,000 - equivalent to 3p in every £100 it received in donations - to charitable purposes.
On the basis of the report by the NAO, the Committee took evidence from the Charity Commission and HM Revenue and Customs on the Cup Trust and the Commission’s procedures for regulating charities on 7
March 2013. The Committee published its report on 4 June 2013.
Government response to the Committee
1: Committee of Public Accounts recommendation
The Commission should publish the evidence that led it to register the Cup Trust in the first instance and to allow the Trust to remain registered, and should review urgently its conclusion that the Trust meets the legal definition of a charity. If the Commission continues to conclude that the Trust is legally a charity, it should identify ways the law should be changed to ensure that organisations like the Trust are not granted charitable status.
1.1 The Commission agrees with the Committee’s recommendation.
1.2 The Commission has reviewed its conclusion that the Cup Trust meets the legal definition of a charity and reached the same conclusion. The Commission will publish justification for this decision after its statutory inquiry, currently the subject of litigation in the Charity Tribunal, is concluded. Target implementation date: 2014.
1.3 The Commission had to register The Cup Trust, since it was legally established for exclusively charitable purposes for public benefit and fell within the jurisdiction of the High Court, as confirmed by independent legal advice. The public benefit requirement relates to the purposes of an organisation seeking registration, not its subsequent activities. The Commission is currently unable to publish the justification for its decision, as this is subject to a statutory inquiry which is being challenged in the Charity Tribunal, but intends to publish it as part of the report of the inquiry when it is concluded. The Commission is currently reviewing its regulatory remit and powers to act where charities engage in tax schemes, although it is not responsible for administering tax reliefs.
2: Committee of Public Accounts recommendation
The Commission should review its procedures to ensure it undertakes proper and appropriate checks before registering a new charity. It should liaise with HMRC before registering any charities where there are ‘red flags’ that raise concerns about trustees or where charities are based in tax havens.
2.1 The Commission agrees with the Committee’s recommendation. Recommendation implemented.
2.2 The Commission works closely with HMRC, and is developing a joint portal to apply simultaneously for registration as a charity with the Charity Commission and recognition as a “charity for tax purposes” by HMRC. Having information retrospectively on the corporate trustee and linked individuals has not altered the legal view that the Cup Trust was established for exclusively charitable purposes. Registration processes have developed since then. A new risk framework and assessment process identifies as high risk any complex structures, including links to other companies, so appropriate additional questioning would occur. Where charitable status is satisfied, but concerns remain, charities are monitored.
3: Committee of Public Accounts recommendation
The Commission should review whether it has investigated all of the cases identified by HMRC and, if not, should do so. The results of this review should be published, setting out clearly how many charities have been deregistered.
3.1 The Commission agrees with the Committee’s recommendation. Recommendation implemented.
3.2 Of the eight potential tax avoidance schemes, there is one charity the Commission is investigating. The report into this will be published at the end of the inquiry. None of the remaining seven involve charities in England or Wales. The 300 cases are not tax avoidance schemes similar to The Cup Trust. HMRC has provided information about relevant charities of concern under the statutory gateway, including the names of 12 charities they are investigating for possible criminal prosecution. The Commission has one inquiry and one compliance case into these charities. Three charities are no longer registered.
4: Committee of Public Accounts recommendation
The Committee welcomes the C&AGs agreement to examine the Commission’s approach to regulation. The C&AG’s review should include the Commission’s approach to the timeliness and effectiveness of enforcement action, its approach to tackling fraud in the sector, and its arrangements for sharing information with HMRC.
4.1 The Commission agrees with the Committee’s recommendation. Recommendation implemented.
4.2 The Commission takes proportionate and effective regulatory action to ensure that trustees meet their legal obligations. In 2012, the Commission directly protected £1.8 million of assets and conducted over 90 face to face regulatory meetings. The Commission is a civil regulator, but in 2012 exchanged information with law enforcement agencies 1132 times. The number of trustees removed is low partly because trustees resign pre-emptively to avoid the legal consequences of removal. Legislation has been sought to deal with this. The Commission recognises the need to focus its resources on high risk cases.”
A further Charity Commission response:
“Charity regulator implements committee recommendations
12 September 2013
Charity Commission’s actions set out in response to Public Accounts Committee
The Charity Commission has confirmed it has accepted all and already implemented many of the recommendations made by the Public Accounts Committee (PAC) in its June report about the regulator. The Committee’s inquiry was prompted by criticisms of the Charity Commission’s handling of the Cup Trust case, which is now subject to a statutory inquiry and an appeal process in the Charity Tribunal.
In its response to the committee, published today as a Treasury Minute, the Commission accepts all of the PAC’s recommendations while challenging some of the conclusions on which the recommendations are founded.
In particular, it confirms that it is working increasingly closely with HMRC, including by developing a joint portal allowing charities to apply simultaneously for registration as a charity with the Commission and for recognition as a “charity for tax purposes” with HMRC. The proposed system will maintain independent decision making by the two authorities, but will allow them to work more closely together.
The Commission has also confirmed that it has tightened up its registration process since the Cup Trust was registered in 2009, saying it has implemented a new risk framework and assessment processes which identify complex structures, including links to other companies, as high risk, allowing the regulator to ask probing questions where it has concerns.
Sam Younger, the chief executive of the Charity Commission, said:
“I am confident that the Commission has responded quickly and effectively to the PAC report. Indeed, many of the committee’s recommendations relate to work that is already in train – for instance the changes to our registration processes. The PAC report focuses on a narrow aspect of the Commission’s regulatory role, namely that concerned with investigations and enforcement. It is important to note that our regulatory approach reflects the fact that many charities are tiny, most trustees are volunteers, and problems in charities often result from incompetence or inexperience rather than deliberate abuse. That is why our statutory objectives as set by Parliament are wide, and include the provision of guidance to charity trustees.
However, I accept that we have sometimes been too reticent in using our powers during investigations and that we must address this. We have often given trustees too many chances to put things right before taking action. We have also been clear that we need stronger powers to deal with the most serious cases of abuse in charities. For example, we have used the opportunities presented by Lord Hodgson’s review of the Charities Act and the Law Commission’s charity law project to ask for a general power of disqualification. Such a power would improve our ability to disqualify individuals whom we suspect of wrong doing from acting as trustees. Too often, we see trustees resigning when we start the process of removing them, meaning that they are free to act as trustees for another charity. A general power of disqualification would allow us to stop that from happening. We are also taking a much tougher approach to charities that have repeatedly failed to file accounts with us. We are urging all charities that are currently in default to file their accounts immediately.”
Effective regulatory action
The Commission’s response to PAC also states that it takes “proportionate and effective regulatory action” to ensure trustees meet their legal obligations. Last year, the regulator directly protected £1.8 million in charity assets, conducted over 90 face-to-face regulatory meetings with trustees and exchanged information with law enforcement agencies 1,132 times.
Earlier this week, the Commission announced that it will be dealing more robustly with charities that persistently fail to file annual accounts. Sam Younger told an audience at a charity law event on Monday that the regulator would be “stepping up its approach” to dealing with trustees who persistently file late and who are “willfully negligent, or worse, have may have something to hide”.”
Here is another press release from the Charity Commission:
“Charity Commission chairman heralds tough new era for regulator
13 September 2013
William Shawcross tells charity audience the new board is “determined to improve the Commission’s performance”
William Shawcross, the Chairman of the Charity Commission, told a charity audience that the regulator’s new board is “grasping the nettle” and improving the Commission’s performance to ensure the regulator promotes public trust and confidence in charities.
Speaking at the Rathbones Charity Symposium in London, Mr Shawcross acknowledged that the Commission, and charities, had come under fire in recent months and assured the audience that the Commission is now “concentrating on tackling the real problems that we and our friends and critics have identified”.
William Shawcross referred to the criticisms made by the Public Accounts Committee and said:
“I do not agree with all of the criticisms the Committee made. But the Committee is right in one respect: the Commission can and must do more to take action against charities that fail to comply with the law and bring other charities into disrepute as a result.
Since taking over the Commission, I have appointed a brand new board of exceptionally talented people who are determined to improve the Commission’s performance. Among our new board members is Peter Clarke, who is a former Deputy Assistant Commissioner in the Metropolitan Police Service, where he was Head of the Anti-Terrorist Branch and National Co-ordinator of Terrorist Investigations. Peter Clarke is only one of many new board members who symbolise the fact that the Charity Commission means business. We intend to ensure that charities comply with the letter and the spirit of the law. And that therefore the public can have confidence in donating to charities. Under the leadership of the new board, we have already begun to make improvements.”
Mr Shawcross cited three areas in which the new board had begun to introduce changes: the regulator’s approach to serious non-compliance; its approach to charities that repeatedly fail to file their accounts; and its work to prevent and tackle terrorist abuse of charities.
Referring to the Commission’s investigatory work, he said the regulator has, “often given trustees too many opportunities to resolve problems themselves, before we took definitive regulatory action” and confirmed that the new board is determined to “get tougher with charities who do not comply and are under investigation”.
But he stressed that the Commission’s approach must reflect the voluntary nature of the sector.
“We must be careful. We have a really difficult line to tread. We are the regulator of charities, the policeman when we have to be. But we must not become the Stasi of the charitable world.
Deliberate abuse in charities is not the norm. For every trustee who commits abuse there are a thousand whose intentions are good. They make mistakes but these are rarely venal. We must not come down like a ton of bricks on those trustees who are just a bit too laid back. Instead we must continue to give the well-intentioned majority the tools they need to keep their charities on the straight and narrow. We must, for example, continue to produce web based guidance that helps trustees understand what the law expects of them. This is a very important part of our work.”
Mr Shawcross also emphasised trustees’ duties to explain their decisions to the public, citing executive pay as an example:
“If trustees feel it is in their charity’s interest to pay high salaries to attract talented people, then they should have the courage of their conviction and explain their decisions publicly. There is no point in moaning how difficult and vital the job is in the 21st century. They must step up and take responsibility for keeping the public informed and for maintaining public support. No-one else is going to do this on charities’ behalf. I’m delighted, therefore, about the National Council of Voluntary Organisations’ plan to develop an advisory code for trustees on senior staff salaries. This is a great example of a charity-led initiative aimed at providing guidance to charities and information to the public.” “
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
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.