Re The Cup Trust; Charity Commission for England and Wales v Mountstar (PTC) Ltd and Others
| Jurisdiction | England & Wales |
| Judge | Mr. Justice Snowden |
| Judgment Date | 21 April 2016 |
| Neutral Citation | [2016] EWHC 876 (Ch) |
| Docket Number | Case No: HC 2015 003105 |
| Court | Chancery Division |
| Date | 21 April 2016 |
[2016] EWHC 876 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane
London, EC4A 1NL
Mr. Justice Snowden
Case No: HC 2015 003105
In the Matter of the Cup Trust
And in the Matter of Section 78(5) of the Charities Act 2011
Ben Jaffey (instructed by Charity Commission) for the Claimant
Keith Gordon (instructed by Osborne Clarke LLP) for the First Defendant
Jonathan Davey QC (instructed by Stone King LLP) for the Second and Third Defendants
Hearing date: 19 January 2016
This case concerns the use of a charity in tax avoidance. It is an application issued on 24 July 2015 by the Charity Commission for England and Wales ("the Charity Commission") pursuant to section 78(5)(b) of the Charities Act 2011 ("the Charities Act"). The Charity Commission seeks a direction from the court sanctioning a decision of the Second and Third Defendants ("the Interim Managers") who are solicitors and partners in Stone King LLP, and who were appointed joint interim managers of a charity known as "the Cup Trust" by orders of the Charity Commission on 26 April 2013 and 18 February 2014 respectively.
The Cup Trust was created pursuant to a declaration of trust dated 10 March 2009 and was registered as a charity on 7 April 2009. The First Defendant, ("Mountstar"), which is a BVI company, was the sole corporate trustee of the Cup Trust. It is common ground that in 2010 the Cup Trust was involved in a tax avoidance scheme ("the Scheme") devised and promoted by entities related to a Mr. Matthew Jenner ("Mr. Jenner") who was a tax adviser and a director of Mountstar until his resignation on 10 April 2014 and subsequent bankruptcy in March 2015.
The purpose of the Scheme was to enable UK taxpayers who were clients of a firm known as HNW Tax Advice Partners ("HNWTAP"), with which Mr. Jenner was associated, to claim higher rate tax relief on what were portrayed as charitable donations to the Cup Trust. HNWTAP charged its clients an up-front fee for participation in the Scheme, and will charge them a contingency fee if the Scheme successfully qualifies for higher rate tax relief.
In addition, the Cup Trust has made claims totalling about £46 million for Gift Aid on the "donations" from the taxpayers. If successful in recovering such Gift Aid, the Cup Trust will pay a contingency fee of about £6.3 million to a partnership called "Harry Associates" that has been acknowledged by Mr. Jenner to be a vehicle for the payment of fees to independent financial advisers who introduced the participant taxpayers to HNWTAP, and to others connected with the Scheme.
Those Gift Aid claims have been rejected by HMRC. The decision by the Interim Managers for which the Charity Commission seeks the sanction of the court is to discontinue the Cup Trust's appeal to the First Tier Tribunal (Tax) (the "FTT(T)") against HMRC's rejection of its claims. The Interim Managers have been advised by leading counsel that the Cup Trust's prospects for a successful appeal are "very slim indeed, or negligible", and that the terms of an offer by Mountstar to fund the appeal are inadequate.
Mountstar, now acting by its sole remaining director, Mr. Anthony Mehigan ("Mr. Mehigan"), disputes those propositions and has submitted revised funding proposals. It contends that the Cup Trust's appeal should not be discontinued by the Interim Managers, but should proceed with funding provided by Mr. Mehigan, leaving it to HMRC to apply to strike out the appeal or determine it summarily if it considers the appeal is hopeless.
The Scheme
The tax avoidance Scheme devised by Mr. Jenner had a number of stages. In outline,
i) the Cup Trust borrowed money interest-free for a day from a Mr. McCulloch, who was an associate of Mr. Jenner;
ii) the Cup Trust used the borrowed money to purchase gilts at market value from another trust ("the VL settlement");
iii) the Cup Trust then sold the gilts at a nominal value (0.01% of full value) to an intermediary, a Mr. Clark;
iv) Mr. Clark then sold the gilts on to a high-net-worth individual UK-based taxpayer at the same nominal value;
v) the taxpayer then sold the gilts back to the VL settlement at full market value;
vi) the taxpayer then "donated" the proceeds of the sale of the gilts plus a nominal sum (0.02% of the full value) to the Cup Trust;
vii) the Cup Trust then used the "donation" to repay the original loan from Mr. McCulloch; and
viii) the Cup Trust held a call option over the gilts which it could exercise if for any reason it did not receive a matching donation from the taxpayer that would compensate it for the sale at an undervalue.
All of the steps set out above were transacted utilising a trustee, which held the funds in its bank account and also held legal title to the gilts on bare trusts for the relevant parties at all times. The sales were all effected by transfers of beneficial ownership of the gilts and monies between the bare trusts, each such transfer being executed by Mr. Jenner on behalf of a company acting as common attorney for all of the parties. This enabled the entire sequence of steps to be executed on the same day, virtually simultaneously, and repeated many times over the course of a day. The entire process described above was repeated 826 times in ten rounds between 30 January 2010 and 28 November 2010, and involved 300–400 taxpayers. The total value of the "donations" made by the taxpayers to the Cup Trust was some £176 million. Each of the taxpayers then claimed higher rate tax relief on their "donations" (totalling some £55 million) and the Cup Trust claimed Gift Aid (totalling some £46 million).
Net income of £176 million would have made the Cup Trust one of the larger charities in England and Wales. However, the reality was that the transactions were entirely circular, with almost all of the money and all of the gilts ending up where they started. The only monies retained by the Cup Trust at the end of the Scheme were the nominal payments made by the taxpayers. Those sums totalled about £155,000 (i.e. under 0.1% of the £176 million turnover).
The intended effect of the Scheme was subsequently summarised by the First Tier Tribunal (Charity) (the "FTT(C)") in a judgment dismissing a challenge by Mountstar to the appointment of the Interim Managers: see Mountstar (PTC) Limited v. The Charity Commission for England and Wales [2013] CA/2013/0001, 0003,
"If successful the [Cup Trust] will receive some £46 million gift aid from HMRC whilst the donors' higher rate tax relief totals some £55 million. That contrasts with the more conventional gift aid arrangement where the donors give £176 million which the [Cup Trust] retains and then claims gift aid (£46 million) generating total funds of £222 million for the [Cup Trust]. The donors receive their higher rate tax relief of £55 million to offset their original donations of £176 million, leaving them £121 million out of pocket. Thus, if successful, the £155,000 of actual cash provided to and retained by the [Cup Trust] generates £46 million gift aid and £55 million tax relief for the donors at a total cost of £101 million to HMRC."
Before its implementation, the Scheme was the subject of a written opinion obtained from Mr. Rex Bretten QC dated 7 January 2010. Mr. Bretten concluded that the Scheme was a tax avoidance scheme and would undoubtedly be challenged by HMRC. However, he advised that provided that the arrangements were implemented as envisaged, he was of the view that it was more than likely that they ought to succeed in securing higher rate tax relief for participants in the Scheme.
The Scheme was notified to HMRC under the Disclosure of Tax Avoidance Scheme rules. HMRC published a notice to taxpayers dated 29 March 2010 warning that (in its view) the Scheme was ineffective:
"Spotlight 9: Gift Aid with no real gift
An avoidance scheme exploiting the Gift Aid provisions has recently been disclosed to HMRC. The scheme seeks to exploit the rules which enable a charity to claim a repayment of tax at the basic rate on a qualifying donation by an individual. The individual may claim relief for the donation on the difference between the higher and basic rates of tax.
The scheme depends upon a circular series of payments. It starts with the charity purchasing, say, gilts of £100,000 which pass through a third party to an individual taxpayer for perhaps £10. The taxpayer is expected to make a sale for £100,000 and pass the money to the charity. There is an option that ensures the gilts will be returned to the charity if it does not receive a cash gift of £100,000 within one or two days.
HMRC do not accept that the charity is entitled to a repayment of tax or that Gift Aid relief is due to the individual. In HMRC's view a gift has not been made to the charity as it is no better off than before entering the arrangements. Therefore Gift Aid is not due.
HMRC will challenge the reliefs claimed in any instances where this scheme has been used and will litigate where appropriate."
Following implementation of the Scheme, the Cup Trust made its claims for £46 million Gift Aid. In October 2011 HMRC indicated that payment of Gift Aid would be withheld pending completion of its inquiries and in 2012 HMRC served notice of a formal inquiry on Mountstar relating to the Gift Aid claims. In default of receipt of requested information, HMRC also served a notice to produce documents in December 2012.
The Appointment of the Interim Managers
The fact that the Cup Trust...
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