A charity tax-avoidance scheme that donated just £55,000 to good causes, having raised £176.5m, allowed its investors to avoid £46m in gift aid, it has been revealed.
The storm centres around The Cup Trust - which has been investigated by the Charity Commission, but managed to keep trading because it had not broken any charity laws - which was unearthed by The Times.
The Trust had employed an offshore bank loan to buy £1m gilts, which it then sold to investors who had paid a fee to join the scheme, for a nominal fee. The Trust then donated around £500 to charity on the investors' behalf. The investors then sold the gilts and "donated" the money to the Cup Trust.
Depending on what level they paid tax, it then allowed the investors to claim between £250,000 and £375,000 in gift aid relief. At the same time the Cup Trust used the "donation" to repay the loan.
The Cup Trust's one page, 100-word website says it makes grants to smaller charities that help children and young adults. It received private donations totalling £97.58m in 2009/10 and £78.93m in 2010/11.
However it declared that it spent nothing on charitable causes in 2009/10, and just £55,000 a year later.
Its accounts reveal that over the two years it spent £176.4m buying government bonds - some 99% of its income - and later sold the majority, or even all the bonds, for a paltry £17,000. Just £107,145 remained on the balance sheet in its accounts for the year ending March 2011.
The sole trustee - Mountstar (PTC) Ltd - is registered as based on the tax haven of Tortola in the British Virgin Islands.
A spokesperson for the Charities Commission, said: 'We cannot take action against a charity unless we are able to demonstrate that its trustees have breached their legal duties. Nor can we take action against a charity simply on the basis that it spends a relatively small proportion of its income on charitable activities in any given year. It is acceptable under charity law to invest in a fundraising scheme and to plan expenditure over a number of years. It is for trustees to decide how to apply their charities' funds. Most trustees make these decisions well and in the best interests of their beneficiaries.
'It is important to stress that the Cup Trust is a highly unusual structure and operation. It is also important to note that it remains to be seen whether the charity' gift aid claims will prove successful. Decisions about awarding tax relief to charities are for HMRC. We have no remit over tax issues, and cannot comment on HMRC's activities or decisions.'
An HMRC spokesman said: 'HMRC is well aware of this type of avoidance scheme. 'Dedicated teams are policing the rules by checking that charities and their donors comply with the rules. We also work closely with the Charity Commission carrying out joint enquiries when appropriate.
'We have increased the number of staff policing the charity tax rules and as a result so far this year we have already brought in over £55m of additional tax, an increase of £15m on last year's total. Criminal investigations are also underway.
'The government has made nearly £1bn available to us to police the tax rules. Where we find tax avoidance we challenge it and stop it as shown by a string of high profile successes in the tax courts.'