Rules that allow HM Revenue & Customs to check whether charity staff are fit-and-proper persons have been used about 200 times to prevent fraud, an audience of charity tax experts heard yesterday.
Senior HMRC official Cathy Wilson told the Charity Tax Group annual conference that the test, introduced in 2010, had been controversial when it was introduced, but it was "an essential tool" for preventing charity fraud.
Before the introduction of the test, she said, it had been very easy for fraudsters to set up charities and approach HMRC for Gift Aid – but since its introduction, Wilson said, the test had been used about 200 times to discourage attempts at fraud and no one had complained about it.
She said: "Usually, we’ve said ‘who are you and what are you up to?’ and they’ve just gone away.
"We pay out £1bn a year to charities and unscrupulous people want a share of that money. They see it as free money.
"Everyone thinks we’re paranoid – and we are. But just because we’re paranoid doesn’t mean they aren’t out to get you. And fraudsters are out to get charity tax relief."
Wilson said charity tax reliefs are structured so that HMRC pays out relief up front and carries out checks only later on how the money has been spent. This system, she said, was designed to ensure charities get Gift Aid quickly, but left the system vulnerable to fraud.
"We found that people were coming and saying ‘here’s our Gift Aid claim’, and we paid – but when we checked, they had disappeared," she said. "We were approached by people making claims who we knew were fraudsters, but we had no statutory basis for refusing the claim.
"We had mass registrations when the same people would set up lots of charities and make lots of claims, or they would hijack the identity of legitimate charities. We got fictitious donations. We got people infiltrating legitimate charities to make claims and siphon off money for themselves."
Wilson said that charities and charity staff who claimed tax relief were vetted to ensure they did not have a history of fraud. "We check anyone who comes along and says they want tax relief," she said. "We want to check that anyone we let into the club won’t abuse reliefs.
"We have got a front door that we protect quite strongly, because once you’re through the front door you’ve got access to all this wonderful tax relief."
Wilson said there had been three successful prosecutions of charity fraudsters in the tax year 2012/13, and more were in the pipeline. She said that several cases involving charitable tax avoidance were going to tribunal.