Tuesday, 19 March 2013

13. Charity regulator lessons from the UK Cup Trust case?

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On 7 March 2013 the Chair and Chief Executive of the Charities Commission of England and Wales, and the Chief Executive of the UK tax authority, were grilled by the House of Commons Public Accounts Committee.  The topic was “Cup Trust and tax avoidance”.  Cup Trust was a charity involved in a circular scheme apparently designed to generate gift aid relief.  It was, effectively, a tax avoidance scheme involving 46 million pounds of gift aid paid out by the tax authority.  (It is still unclear whether the tax authority actually paid out the gift aid – though newspaper reports suggest that it stopped the payments in time).

The transcript and video is available on public record:

This case gives an interesting insight into how the England and Wales charities regulator operates. There are lessons here for both the NZ and Australia charity regulators, as well as the charities they regulate.

Four specific topics caught my attention in the transcript:

-         It gives some statistics about the number of England and Wales charities and regulator investigation activities;
-         The Cup Trust discussion highlights some of the risk filters a regulator may be expected to use in its screening process;
-         It gives an example of why it thinks the regulator has a “soppy” annual form which does not collect enough information for risk assessment purposes; and
-         It highlights some grey areas which may, or may not, need to be resolved in order to improve public trust and confidence in the sector.

The Chair and Chief Executive stood up reasonably well to a series of pointed questions.  However, even though the Chair had been only employed for a few months and the Chief Executive for two years, it was surprising that they both admitted to not having read a key National Audit Office report from 2001 “Giving Confidently: The role of the Charity Commission in Regulating Charities”.   Several other mistakes were also admitted, including not having made a public statement saying they did not like schemes of the sort in question, and not cooperating closely enough with the tax authority.

The details

1. The charity regulator’s investigation numbers and resources

The UK charities regulator is responsible for regulating “600,000 charities in Britain”.    Between 20-25 new charities register every day.  The regulator has allocated 15% of its resource to investigations (approximately 25 staff).  It has about 70 “statutory inquiries” open at any one time; in the last year it closed 9 statutory inquiries and opened 12.  The regulator also conducts approximately 20 compliance (monitoring) visits each year.  The regulator said that 2% of the 50,000 financial accounts filed by charities are specifically looked at.

In comparison, NZ has 25,000 registered charities and, before it was disestablished and transferred to the Department of Internal Affairs, the charities regulator had 10 investigations staff (23% of the 44 total staff) according to its 2011 Annual Report dated October 2011.

As part of the submissions, the UK tax authority also noted that it undertakes 5,000 charity interventions per annum, 300 of which involve fraud.  In recent times they prosecuted four individuals.  The tax authority shares information with the charities regulator, has 6-monthly strategic meetings and does joint investigations.

2. Screening tips for a charities regulator

The Public Accounts Committee highlighted a number of areas which they expected the charities regulator to use as part of its screening approach:

-         The reputation of the charity advisor.  In this case the advisor was NT (No Tax) Advisors.  Apparently their prime business is avoiding tax and that is well known.
-         The number and nature of the charity trustees: The charity had a sole corporate trustee which was based in a tax haven – the British Virgin Islands.
-         The proportion of money spent on charitable purposes (as a proportion of total spend).  The charity gave away 55,000 pounds despite revenue of 177m pounds.
-         Charitable spend being conditional on receiving money from the government.  The charity said it would only pay out for charitable purposes once it had received 46m pounds from the government by way of gift aid (which is similar to donation tax credits and DGR deductions but it is paid directly to the charity rather than to the donor).
-         Late filing, especially for large charities.  The charity was 235 days late in filing its return with the regulator.  The Committee was particularly surprised that a charity of this large size would be allowed to file so late with action not being taken sooner.
-         Charity disposals of assets that are undervalued.  The Commission agreed that it would be concerned if any charity trustee disposed of assets at an undervalue.  However in this case they noted that the scheme ensured assets with charitable purposes were protected.
-         Circularity.  This feature is common to many tax avoidance schemes involving charities.
-         Involvement of high net worth individuals.  In respect of these particular schemes the tax authority noted that they are a “high net worth fiddle” designed to steal money from the taxpayer.
-         Grant-giving charities.  Grant-giving charities (who do not undertake charitable work directly but pass money on to other charities) were identified as being in a particular risk category.
-         Related party receipts of grants:  The Committee asked the Commission to clarify whether the charities who received grants from the Trust had any connection with the people running the Trust.

3. “Soppy” annual return forms

The Committee was critical of what they called “soppy” questions in the annual return that was required to be submitted to the regulator.  It is noteworthy that the England and Wales regulator asks less questions for small charities with income under 5,000 pounds – which the Cup Trust appeared to do, at least in one year.

The Committee specifically noted that charities were not asked to list their biggest grants, despite grant-giving charities being a particular risk category.

In comparison to NZ and the current Australian proposals for their annual returns:
-         Both NZ and Australia asks all charities for the amounts of grants paid (although they do not require a breakdown)
-         Both NZ and Australia asks all charities to identify if their activities involve making grants to other charities
-         Only Australia asks if grants (or any other payments) are made to related parties (although this only applies to charities with revenue above $250,000 pa).
-         NZ asks for the same information from all charities, whereas 78% of Australian charities are asked to provide less information in their annual return.

4. The grey areas of charity regulation

The Committee members asked pointed questions and the members did not always agree amongst themselves.  Here are some of the grey areas they touched on:

-         Should there be a minimum proportion of money that a charity gives away each year?  This question was raised by the Committee, however the regulator noted that it is not for them to determine, because that would move them from being a regulator to being a licensing authority.  If it was seen as a critical issue, the regulator stated that a law change would be required.
-         Should the regulator actively seek law change?  One Committee member said the regulator was “as mute as a eunuch” about the powers it doesn’t have, giving a clear expectation that the regulator should actively seek law changes to address perceived weaknesses.  Two specific law changes mentioned were in respect of setting a minimum proportion of money that a charity gives away, and stronger law to enable the regulator to remove trustees.
-         Should the charities regulator be a tax avoidance expert?  The Committee Chair said “It is your job to know if an organisation that purports to be a charity is actually an organisation that is avoiding tax.” The assumption was that a tax avoiding charity would not be for the public benefit.  There was a view that it was not sufficient for the charity regulator to simply rely on the tax authority to let them know charities are being used as tax avoidance mechanisms.
-         Should the regulator focus on overheads?  One Committee member cited Oxfam as spending only 3% on administration costs and 97% going to charity.  They were of the view that this is the sort of proportion all charities should apply, and if they do not then it should be a flag for the regulator. 
-         What are the consequences if a regulator has a poor regulatory approach?  Throughout the transcript there is discussion of the charities regulator not using all its powers sufficiently.  For example, not removing more trustees (in a sector which apparently has 1.1billion of fraud, according to the National Fraud Authority estimates).  The transcript ends with the statement “we are pretty appalled-I think-about whether or not you have the right regulatory regime to give the public confidence that charitable trusts are properly regulated by you.”
-         The role of a light touch regulator. The UK regulator apparently uses the phrase “back on track” to emphasise that it does not take charities off the register but focuses on putting them back on track when they get into trouble.  In that sort of environment where you are a light touch regulator and have a minimalist compliance function, how do you really know that “99.9% of cases of charities and trustees are decent organisations run by decent people doing the best for their local communities”?  This transcript suggests that it is hard to argue that you should be light touch when the National Fraud Authority estimates that the sector has 1.1b of fraud occuring each year.

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