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18th May 2014

Another 'Cup Trust' Bites the Dust

Like many, we breathed a sigh of relief when a recent Tribunal decision rejected a tax avoidance scheme involving a charity. Both the arrogance of the scheme’s creators and participants as well as the sums involved are extraordinary.

Such schemes have recently been the focus of substantial media attention. This was the case in the infamous example of the ‘Cup Trust’, where many felt HMRC and the Charity Commission were inexcusably slow to intervene where a charity was used as part of an arrangement to claim enormous tax relief, despite only a small proportion of the donations received being distributed to charity.

HMRC has just won a battle over a remarkably similar scheme, named the Blue Box scheme, in the case of William Ferguson and The Commissioners for Her Majesty’s Revenue and Customs, decided by the First Tier Tribunal (Tax) on 9 May. In this scheme, participants invested in government bonds before making a substantial ‘gift’ to a charity, the Northern Irish Somerton Charitable Trust. When the bonds were sold, the reality was only 1 percent of the money went to charitable causes, with the remainder being returned to the participants. The scheme was fiendishly complex, but that is the essence.

HMRC refused to pay tax relief related to the purported donations in the scheme and one individual challenged this refusal before the Tax Tribunal. He lost. The Tribunal found it was always intended that 99% of the value of the assets would be retained, through the convoluted arrangement and via the charity, by the participants. Such an arrangement could not be said to involve a gift at all. HMRC have said 60 participants in the scheme are now expected to pay the taxes due. 3 people involved in the scheme had already paid £24 million in tax prior to the hearing. Financial Secretary to the Treasury Nicky Morgan summarised neatly, ‘The government has provided charitable tax reliefs to encourage people to give to charities. We will not tolerate abuse of these incentives for the purposes of tax avoidance.’

We must hope that is borne out: this was not so with the Cup Trust (the resolution of which is still pending) but it was in this latest Blue Box scheme. It is hugely reassuring to see HMRC’s action in this and the Tribunal’s decision backing this. Tax avoidance schemes tarnish the reputation of charities as a whole and the legitimate schemes that lead to a reduction in tax, such as Gift Aid and tax relief on the gift of certain assets (relevant to this latest case). The Cup Trust debacle was disastrous in regard to reputation: perhaps the Blue Box case will begin to repair the damage.

Additional measures introduced by the recent budget will mean, if and when implemented, those who use charity based tax avoidance schemes will now have to pay disputed tax upfront. Hopefully this will significantly undermine the culture prevalent with some, of chancing their arm in the hope they’ll get away with it.

For more information, please contact Chris Knight on 01604 463103 or click here to email Chris.

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