Tory-linked Taxpayers' Alliance 'subsidised' by the taxpayer

A campaign group which claims to represent the interests of ordinary taxpayers is using a charitable arm which gives it access to tax relief on donations from wealthy backers, the Guardian has learned.

The Conservative-linked Taxpayers' Alliance, which campaigns against the misuse of public funds, has set up a charity under a different name which can secure subsidies from the taxman worth up to 40% on individuals' donations. In one example, Midlands businessmen said they channelled funds through the Politics and Economics Research Trust at the request of the Taxpayers' Alliance after they asked the campaign group to undertake research into policies which stood to damage their business interests. The arrangement allowed the Taxpayers' Alliance to benefit from Gift Aid on the donations, a spokesman for the donors said.

Labour politicians attacked the apparent scheme as hypocritical, and tax accountants warned it could breach charity law, which states that organisations may not be charitable if they have political purposes.

Regulators at the Charity Commission have opened several assessment cases and are scrutinising the arrangements.

"The Taxpayers' Alliance appears to be exploiting the taxpayer rather than protecting their interests as they claim to do," said John Prescott, the former deputy prime minister. "This body ought not to be subsidised to pursue its political goals. They have now become properly the non-taxpayers' alliance."

The Taxpayers' Alliance is one of the most influential pressure groups in the country and has established close links to the Conservative party frontbench. It campaigns for less waste in government and lower taxes, and earlier this year it emerged that it is funded by leading Tory donors. It claims to represent "a grassroots army of 32,000 supporters" but it has also emerged that a director of the alliance, Alexander Heath, does not pay British tax and lives in France. Its chief executive, Matthew Elliott, strongly denies the alliance is "a Conservative front organisation", but it is influential in Conservative circles. In October the shadow chancellor, George Osborne, proposed a public sector pay freeze which had been recommended a month earlier by the alliance, and Elliott, who describes himself as "a free-market libertarian", proposed that no public worker should earn more than the prime minister without the chancellor's approval before Osborne announced it.

The Charity Commission's records show the charitable arm was established as the Taxpayers' Alliance Research Trust in 2007, before changing its name to the Politics and Economics Research Trust. Elliott is named as its main contact and the trustees include leading Taxpayers' Alliance supporter Patrick Barbour, the founder of Reform, a free-market thinktank which advocates lower tax and public spending. Until he became leader of the UK Independence party last month, Lord Pearson of Rannoch was also a trustee.

The trust received donations worth £373,230 in 2008 and approved 29 grant proposals amounting to £278,520 with the stated aim "to advance the education of the public" and to "promote for the public benefit research into matters of public taxation, public policy, applied economics and political science". Unusually for a charitable trust, the accounts do not name the grant recipients.

The Midlands Industrial Council, a powerful business group which has donated £1.5m to the Conservatives since 2003 and represents the owners of private companies in the car, haulage, property and construction industries, said it has donated both through the Taxpayers' Alliance, which as a company does not attract tax relief on donations, and the Politics and Economics Research Trust, which does.

"The charitable arm is where specific projects are being researched on specific topics," said David Wall, the council's secretary. "We donated for work they were doing predominantly on congestion charging. When there was talk of it coming to Birmingham, we asked them to look into road charging to see what the likely effect would be on the haulage industry. We were asked for funding to the charity which means they can benefit from gift aid. I know that some industrialists made donations through the charitable arm."

Asked about the impression that the alliance was in effect benefitting from a subsidy from taxpayers to carry out work funded by rich businessmen, Elliott declined to comment. "I will talk about the work of the Taxpayers' Alliance, I will talk about Christmas, but I don't want to talk about this," he said. "We are confident that our funding arrangements fall within the law and the guidance of the Charity Commission."

The Charity Commission's guidelines on campaigning and political activity state that "an organisation will not be charitable if its purposes are political". It states that trustees must not allow the charity to be used as a vehicle for the expression of the political views of any individual trustee or staff member.

A leading tax accountant said it was extraordinary that the alliance appeared to be benefitting from charitable tax relief. "Donors are typically saving tax on their contributions and so the government is chipping in between 20% and 40% to help the Taxpayers' Alliance with its work," said Mike Warburton, a tax specialist at Grant Thornton. "Your readers may be surprised that an organisation which argues for lower taxes and lower public spending is asking the government to do that for its research arm."

The Charity Commission has opened several "assessment cases" prior to a possible investigation.

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