European Recycling Company says it cannot pay more to the charity because margins are very small

Shoe recycling banks set up across the UK to benefit the Variety Club are delivering less than £4.50 each a year for the charity's good causes, a Guardian investigation has revealed.

The thousands of tonnes of footwear given in aid of the entertainment industry's charity for sick, disabled or disadvantaged children are sold on by a private company owned by a German clothes recycling magnate. But the European Recycling Company (ERC) confirmed that in 2009 it gave just £5,500 to the Variety Club while published accounts suggest it had made profits of more than £350,000.

In 2011, the donation was set to be more than £30,000 from 7,000 collection points, the charity said. Donors voiced surprise at the size of the charitable contribution and called for the amount given to be written clearly on the recycling points.

"The ratio is ridiculous," said Bozena Przybyla, 56, who was giving a pair of shoes to a Variety Club bank at Tesco in Edmonton, north London. "Obviously they have expenses, but I thought that at least 60% of the proceeds would go to poor people."

The Fundraising Standards Board, the charity sector's self-regulatory body, said it was looking into whether the scheme breaches legal guidelines that require recycling points for good causes to display a breakdown of the figures involved.

"As a minimum, the recycling points should comply with the law which requires all commercial participators to confirm the amount raised for every tonne of shoes donated, how much the commercial participator is receiving and how it has been calculated," said Alistair McLean, chief executive of the board.

ERC owns and operates Variety Club-branded bins located in supermarket car parks, council waste sites, and shops and offices around the country. It collects thousands of tonnes of secondhand shoes each year before sending many to be processed in Germany and onwards for commercial sale in the open market in Uganda and other developing countries.

The charity banks have recently collected more than 2,000 tonnes a year, ERC confirmed.

The Variety Club – which is backed by entertainment figures including Joanna Lumley and Michael Parkinson and corporate supporters such as Nestlé and British Airways – defended the operation which, over the past three years, has turned over on average £1.9m per year from shoe sales. It said that this year donations have helped 250 children, including days out for children from deprived areas and "life-enhancing equipment for sick and disabled children".

"We use two slogans – 'Every pair of shoes donated helps us to help them [children]' or 'Recycling your shoes could help buy a wheelchair for a child' – and they are both true," said Agnieszka Swita, a spokeswoman for the Variety Club.

"The way we work with ERC is a simple and transparent corporate fundraising mechanism that is used all the time by the charitable sector and benefits those who need it most."

Earlier this year, the Guardian revealed that a private business had made more than £10m over three years from collecting secondhand clothes for the Salvation Army. The registered charity was asked by the standards board to investigate complaints that it may have misled donors and now makes clear how much its trading company receives for a tonne of clothes and how much goes to the private sector operator.

ERC is controlled by Nerses Ohanian, whose German and Swiss-based businesses makes millions a year in profits from textile recycling under the Soex brand. His registered headquarters are in Zug, the Swiss tax haven.

ERC recycles in the UK only under Variety Club auspices. The company said that in 2010 it donated more than £19,000 from the Variety Club shoe collection. Turnover that year was just over £2m, according to figures seen by the Guardian which ERC would not confirm or deny.

Ohanian denied the donations were too small. "Whatever we pay to the charity, we have a very, very small margin and we cannot afford to pay more," he said.

"It is very hard to pay full freight, pair the shoes, sort them and to make money. Yes, we make money, but two to three years ago it was much better because productivity per box has gone way down. The question is, do we pay the charity right? I don't know how much they pay, if there is more then we have to improve to pay more, but I can tell you the profitability on recycling is 10% to 15% gross margin."

Ohanian's German company, Soex Textil, which recycles clothes for the German Red Cross, made close to £7m in underlying profits on sales of more than £60m in 2009, according to accounts filed in Germany.

Ohanian is listed on the accounts as the sole director of ERC, but described himself as a "passive shareholder". He said Soex's chief executive, Andy Haws, has responsibility for its management.

"People see the Variety Club and they say: 'Every shoe I put in here, its value will go through to the Variety Club,'" Haws said. "Well, no, because you have operational profits, the same as the Salvation Army has, the same as Oxfam has. We are growing and we will continue to give bigger donations to the Variety Club … We are increasing our collections through development. We run a commercial business and it is important the business is sustainable and continues to grow and continues our growth to the Variety Club.

"We are not misleading, we have never misled, we have always been extremely open with the Variety Club."