Payments to 'circular' Gift Aid mechanisms will not be made, HMRC said in 2010

The Cup Trust has recently come into the spotlight for spending £176m on government bonds, which it then sold for only £17,000


HM Revenue & Customs issued a statement almost three years ago saying it would not make Gift Aid payments to a "circular" Gift Aid mechanism similar to the scheme apparently operated by the Cup Trust.

The Cup Trust, which has been labelled a tax-avoidance scheme by sector bodies, was set up in March 2009 and had an income of £176.5m between then and March 2011, according to accounts for that period, making it at one point the charity sector’s 77th richest charity by annual income.

It made grants to smaller charities that help children and young adults and had a charitable expenditure of just £55,000 over the same period, its accounts show.

Its accounts for the year to March 2011 say it had claims pending for £46m of Gift Aid. If donors to the charity paid the highest rate of income tax, they could also have claimed up to £66m in personal tax relief. But in the year to March 2012, the Cup Trust’s income fell to just over £5,000.

The HMRC statement, which was issued on 29 March 2010, said it had recently become aware of "an avoidance scheme exploiting the Gift Aid provisions".

It said: "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 statement does not name the Cup Trust or any other charity, and a spokesman for HMRC said he could not comment on whether the Cup Trust was the charity concerned.

But the statement described "a circular series of payments" that involves a charity buying government bonds and passing them to a taxpayer for a very small amount of money. The taxpayer sells the bonds at face value and gives the face value amount to the charity. That gift allows both charity and donor to claim Gift Aid.

Accounts for the two years to March 2011 show the Cup Trust spent £176.37m on buying government bonds – more than 99 per cent of its total income – but sold most or all of its bonds for just £17,000.

Without referring explictly to the Cup Trust or any other charity, the HMRC statement said: "HMRC does 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."

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