The Charity Commission's failure to stop UK-registered charity the Cup Trust abusing the law to avoid tax is "unacceptable" and could have been easily avoided through carrying out elementary checks, the Commons Public Accounts Committee said.
The charity, which has trustees in the British Virgin Islands (BVI) tax haven, also claimed Gift Aid of £46 million, but has not been paid the money. Committee chairwoman Margaret Hodge MP said the trust never met the legal criteria to qualify as a registered charity. The report said that "despite its declared charitable aims, it is clear that the trust was set up as a tax avoidance scheme by people known to be in the business of tax avoidance".
The MPs warned that the trust could be "the tip of an iceberg" as HM Revenue & Customs (HMRC) told the committee it was aware of eight other schemes relating to charities and investigates around 300 similar schemes a year. The committee will now carry out an investigation into whether the watchdog is fit for purpose.
The MPs said it was "unacceptable" that the trust was registered as a charity in April 2009 with a BVI-based company called Mountstar as its only trustee. The company's directors were well-known to HMRC for being involved in tax avoidance, the MPs said.
"Elementary checks with HMRC could have alerted the commission to the true purpose of the trust and its trustee. By the commission's own admission, the continued registration of the trust has been 'disastrous' for the reputation of the commission and the charity sector."
Despite a two-year investigation, which started in March 2010, the Commission concluded that it could not de-register the trust as it was "legally structured as a charity", despite not being for exclusively charitable purposes. The report noted that the watchdog has still not published the results of the investigation and has not put forward proposals to change the law to stop such abuse.
The committee and National Audit Office (NAO) have repeatedly found "severe shortcomings" in the watchdog's performance over the last 25 years, the MPs said. In 2001 the committee called on it to make more use of its powers but in the last four years it has only removed one trustee, suspended four trustees or officers of charities, and only appointed interim managers of charities on five occasions, the report said.
The MPs said they were "shocked to hear" that the chairman and chief executive of the commission had not read the NAO reports and were not aware of the committee's findings.