There was outrage when it was revealed last week that the Cup Trust, which makes grants to smaller charities that help children and young people, received £176.5m from donors between March 2009 and March 2011, spent that money on buying government bonds and then sold those bonds for less than £17,000. The charity has so far donated only £55,000 to good causes but put in claims for £46m of Gift Aid.
According to Caron Bradshaw, chief executive of the Charity Finance Group, the purpose of the trust appears to have been "a misuse of the charity sector purely to avoid tax". The Charity Commission launched an investigation into the trust in March 2010, shortly after it formed. The commission was "not comfortable with the charity's set-up", but in March 2012, it closed the investigation without taking action after seeking legal advice.
The commission has powers to stop charities disposing of assets in such a way that cause the charity to lose out. But a former commission employee, who asked not to be named, said it might be forced to give approval to the model described above, because it would allow the charity to obtain substantial funds.
There are laws intended to prevent a donor obtaining a material advantage through their donation, including "tainted donor" rules introduced in the 2011 Budget. But it falls to HM Revenue & Customs to enforce those. However, since it is not clear that HMRC has paid out Gift Aid to either donors or the charity, it might not have needed to use those powers.
Clive Cutbill, a consultant at the law firm Withers, says that HMRC also has powers to reclaim any money it has paid out. While there have been widespread questions over how the Cup Trust has been allowed to stay in existence, some in the sector say the regulators have done all they can within the limits of their powers.
John Hemming, chair of the Charity Tax Group and head of tax at the Wellcome Trust, says: "We don't know the whole story. But if there has been an investigation and HMRC hasn't paid out, then haven't the structures worked?"
However, even if the regulators have minimised the misuse of charitable funds, concerns have been raised that the Cup Trust might have dented public trust in the charity sector. As a result, umbrella bodies - including Acevo, the CFG, the CTG and the National Council for Voluntary Organisations - have all said they will work with regulators to ensure they have powers to act. "If there are holes in the current laws, we will help block them," says Hemming.
HMRC has previously said that up to £100m of Gift Aid is claimed through a mixture of avoidance and fraud.
The existence of the Cup Trust also raises the question of whether there are other charities that might exist primarily for the purposes of tax avoidance. Evidence gathered by The Times newspaper suggests that there are several such charities, but one sector expert, who does not want to be named, says there could be as many as 50.
Third Sector was unable to contact anyone at the Cup Trust for comment.
£55k - The amount given to good causes by the Cup Trust between 2009 and 2011
£176.5m - The income of the Cup Trust between 2009 and 2011