The story of Nadhim Zahawi’s taxes has been rumbling on for months; now it may have finally come to a head.
After the Guardian revealed on Friday that Zahawi’s settlement of an HMRC tax bill worth millions included a seven-figure penalty, the Conservative party chairman and former chancellor gave his version of events – and said that his error was “careless and not deliberate”.
But after the foreign secretary, James Cleverly, endured a torrid interview round defending Zahawi on Sunday (and said he was not fully informed about the story in part because he had been “having a bit of a rest and doing some shopping on Saturday”), pressure on the government continues to build. Now Rishi Sunak is facing calls for him to explain what he knew about Zahawi’s affairs when he appointed him to his current role.
What is the story about?
Before he was a politician, Nadhim Zahawi rose to prominence as one of the co-founders of YouGov, a polling company.
When YouGov got started in May 2000, a Gibraltar-based company, Balshore Investments Limited, was allocated shares equal in value to those given to Zahawi’s co-founder Stephan Shakespeare – 42.5%.
Zahawi took no shares himself. Balshore was held by a trust controlled by Zahawi’s parents; he has said that the shares went to Balshore in recognition of his father’s role in setting up YouGov through the provision of start-up capital and advice.
The first YouGov share issuance from 2000 says that another founder, Neil Copp, provided £287,500 of capital and received 15% of the shares. YouGov’s records suggest that Zahawi’s father provided £7,000 to the company two years after it was founded. When the Times spoke to people involved in YouGov at the start (£), none could recall Zahawi’s father being involved.
YouGov was highly successful, and as well as attracting dividends, the stake in the company owned by Balshore was eventually sold by 2018 for about £27m. If Zahawi was the beneficiary of that transaction, he would owe tax on it. A 2005 document suggested that he benefited from the trust on at least one previous occasion, when Balshore at least partially covered a £99,000 loan he had received from YouGov.
The central questions are these:
Did the work done by Zahawi’s father at YouGov’s founding truly merit such a large proportion of the initial shares?
Was the trust really controlled by Zahawi’s parents, or was the true beneficiary of the sale of Balshore’s shares in YouGov Zahawi himself?
Did Zahawi thus avoid paying capital gains tax on the sale of Balshore’s stake?
Did Zahawi give HM Revenue and Customs (HMRC) a straightforward account of his affairs when it came to investigate?
Here are some more unanswered questions about Zahawi’s taxes and the Balshore shares.
Why has the story become a big deal now?
Questions about Zahawi’s tax affairs date back to 2017, when the Guardian reported his links to Balshore.
In July last year, when Zahawi was appointed Chancellor by Boris Johnson, the Independent reported that his finances were under investigation by the National Crime Agency. At the time Zahawi said he was unaware of it, and the investigation was reported to have not led to any action.
Then, a few days later, the Observer reported that an HMRC “flag” was raised over Zahawi’s finances before his promotion. A source close to Zahawi said that he “does not have, and never has had, an interest in Balshore Investments and he is not a beneficiary”.
Prompted by these stories, Dan Neidle, an independent tax expert, started to go through the publicly available documents on Zahawi’s business activities. He reached the conclusion that Zahawi arranged for the shares that would otherwise have been his at YouGov’s founding to go to Balshore, and alleged that “the obvious rationale for this is tax avoidance”, a claim denied by Zahawi. Neidle noted that while Zahawi says he “is not a beneficiary” of Balshore, this is not the same as saying he never has been.
After that, as Zahawi continued to deny through his lawyers that he “set up an offshore tax structure for a tax benefit” and was moved by Rishi Sunak from the treasury to Conservative party chairman, the story went relatively quiet. But last week, the Sun on Sunday reported that Zahawi had agreed to pay several millions of pounds in tax to settle a dispute with HMRC.
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Then, on Friday, the Guardian’s Anna Isaac reported that a source said the settlement with HMRC included a 30% penalty on top of an estimated tax bill of £3.7m. The total sum including the penalty and interest charges, apparently on the sale of multiple tranches of YouGov shares worth more than £20m, was reported to be more than £5m.
That report led to Labour saying on Saturday that Zahawi’s position as Conservative party chair was “untenable” and that Rishi Sunak should sack him. Over the weekend, the Sun on Sunday reported that Zahawi was denied a knighthood after officials contacted HMRC “as part of the normal due diligence”.
What has Zahawi said?
When stories about his tax affairs surfaced last summer, Zahawi described them as “smears”. His lawyers wrote to Neidle [pdf] via email last July demanding he withdraw his allegations and saying that he is “not entitled to publish [the email] or refer to it”, a condition Neidle had already said he would not accept. Last week, the Independent published exchanges with Zahawi from the same period in which he threatened legal action three times.
On Saturday, he took a different approach, with a carefully worded statement that he said he was making to “address some of the confusion about my finances”. He reiterated that his father “took founder shares in the business in exchange for some capital and his invaluable guidance” and said that HMRC had accepted he was entitled to do so – but that “they disagreed about the exact allocation”. Because of this “careless and not deliberate” error, he said he paid what was due “so that I could focus on my life as a public servant”. He did not confirm a figure.
He also said that he resolved the matter between being appointed as Chancellor and moving to be party chair. That implies that he reached a settlement with HMRC while chancellor – and overnight on Monday, Sky News reported that he had indeed done so, a situation which critics suggest created a conflict of interest.
What does ‘careless’ mean?
One important point arising from Zahawi’s statement that unpaid tax on a benefit apparently worth more than £20m was viewed by HMRC as “careless and not deliberate” is what exactly that phrase means.
While a plain English reading might suggest that it means he simply made an error, Dan Neidle told the BBC that the meaning in tax law is more complicated, and may be a designation settled on by HMRC if it concludes it cannot prove deliberate tax evasion.
“‘Careless’ has a very specific meaning,” he said. “‘Careless’ means that you weren’t just wrong, you’re allowed to get your tax wrong … it works like this: You or I, as long as we instruct a proper adviser, we give that adviser the right information, we follow that adviser’s advice, and we check that final tax return to the best that we’re able to, so long as we do that, even if it was completely wrong … we won’t pay penalties. To pay a 30% penalty, you didn’t do one or more of those things.”
