Zahawi’s Careless Tax Error Is Sunak’s Problem

LONDON, ENGLAND - JANUARY 23: Minister without portfolio and Conservative Party chairman Nadhim Zahawi leaves Conservative Campaign Headquarters on January 23, 2023 in London, England. Prime Minister Rishi Sunak has asked his independent ethics adviser to look into the tax affairs of Zahawi, saying there were “questions that need answering”. (Photo by Leon Neal/Getty Images) (Photographer: Leon Neal/Getty Images Europe)

British political scandals, at least in the Conservative era, seem to have a White Lotus quality that is both painful to watch and impossible to ignore. A niggling revelation unsettles the smooth veneer. Then the dial of awkwardness gets turned up until it becomes something hideous.

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The tax travails of Nadhim Zahawi have that familiar feel. Zahawi apologized last summer for mistakenly using taxpayer money to heat his horse stables, but that seemed innocent enough. After all, anyone might fail to notice that energy to their second home and their horse stables were on the same bill. And when as a candidate for Tory leader he denied repeatedly that there was anything to see in his tax affairs, people could have taken him at his word; Prime Minister Rishi Sunak clearly did in appointing him Conservative Party chairman. Now Zahawi’s tax affairs are Sunak’s problem.

After initial deflections, Zahawi admitted last weekend that Britain’s tax authority, HMRC, concluded he had been “careless and not deliberate” in his tax filing and that he had paid to settle the matter — reportedly to the tune of £5 million ($6.2 million), including a 30% penalty. Carelessness can mean many things; say, forgetting to put out the garbage bins on collection day. But in tax terms, it carries connotations Zahawi tried to obfuscate with carefully worded denials. After initially backing his minister, Sunak — who came to power promising “integrity, professionalism and accountability at every level” — has ordered an ethics investigation after admitting he didn’t have all the information at the outset.

Zahawi is, by all accounts, impressive. An immigrant of Kurdish origin from Saddam Hussein’s Iraq, he assimilated into British society, excelled at school, became a successful entrepreneur, and won a seat in Parliament for Stratford-on-Avon. He has held a string of government jobs of increasing importance under four prime ministers. In short, Zahawi is the kind of persons many Britons would want to see rise to high office.

He proved largely adept there, too, winning plaudits as vaccines minister during Covid. He called for Boris Johnson’s resignation 48 hours after his appointment as chancellor of the exchequer. He then backed Johnson’s return after Liz Truss’s premiership imploded, before pivoting to Sunak, who named him to his current post — not a top cabinet job but important enough in the run-up to elections.

It’s hard to see how he’ll be able to continue for long in that capacity. While Zahawi wasn’t charged with a “deliberate” misfiling, which can result in prosecution (as in the case of ex-Formula One boss Bernie Ecclestone), a finding of carelessness also has a specific meaning here. In HMRC’s jargon, the agency considers “what the person did or failed to do and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances.”

Zahawi’s quiet settlement with HMRC, apparently during the brief time he was chancellor, relates to gains from the sale of shares in YouGov, the polling company he co-founded in 2000. At the time, a 42.5% stake in YouGov was placed in a Gibraltar-based company Balshore Investments, described as “the family trust of Nadhim Zahawi” in YouGov’s 2009 annual report. The stake was eventually sold in the tax year 2017-18 for around £27 million.

Like many offshore arrangements, there seem to have been various holding structures involved. Unusually, Zahawi himself claimed no founders’ shares when YouGov was set up. Instead, he explained, shares were allocated to his father in exchange “for some capital and his invaluable guidance.”

Former Clifford Chance tax lawyer Dan Neidle, who set up the non-profit Tax Policy Associates, began digging into those structures after a media report of an investigation into Zahawi’s affairs. Neidle found no support for Zahawi’s claim that his father provided startup capital and little evidence of the valuable guidance Zahawi claimed. He surmised that Zahawi had benefited through gifts and unsecured loans, which should be taxable.

The onus lies on HMRC to prove its charge of “carelessness”; it has lost in the courts where it has failed to establish sufficient evidence. If the blame for error is then placed on an agent or tax preparer, the taxpayer must establish they took reasonable care to avoid any inaccuracies. The fact that Zahawi had to pay penalties would suggest any such defence was either not offered or not accepted, though Zahawi was clearly keen to settle the matter without a public battle.

In fact, there are many questions about these arrangements that may not be answered. But the investigation ordered by Sunak is over the “ethics” of his dealings, not HMRC’s calculations or conclusions. That would hardly seem to need an investigation. His own statements and lawyers’ letters sent to Neidle and journalists who raised valid questions about his tax filings suggest conduct falling short of Sunak’s own minimum bar of integrity and accountability.

Even if the ethics bar is somehow cleared by the investigation, the political damage is already substantial. Investigation is often seen as tantamount to a reprieve (Deputy Prime Minister Dominic Raab is being investigated for allegations of bullying but continues on). In Zahawi’s case, it probably makes things worse. It gives Labour a bruise to punch. On Wednesday Labour leader Keir Starmer called Sunak “hopelessly weak” for not acting more decisively.

Journalists have already been digging into other elements of Zahawi’s private affairs, making him an awkward choice to be the face of a Conservative Party that needs to appeal to poorer voters in the north and recover from a string of scandals (remember Partygate?) that suggest this is an elite that plays by a different set of rules. It also makes it impossible for Sunak to focus on his governing agenda if he’s fighting ethical fires.

Meantime, voters are getting regular reminders of the kind of sleaze stories Sunak hoped to leave behind. A parliamentary committee is investigating whether Johnson deliberately misled Parliament over Partygate. And this week saw the announcement of an investigation into the appointment of Johnson friend and Conservative donor Richard Sharp to the position of BBC chair, after it emerged that Sharp, while a candidate for the job, had introduced Sam Blyth, a wealthy Canadian (who was reportedly prepared to act as a guarantor for an £800,000 loan to Johnson, a distant cousin) to Cabinet Secretary Simon Case, who heads the civil service. In a sign of just how cozy it gets at the top of British politics, Sharp was reportedly once Sunak’s boss at Goldman Sachs Group Inc.

None of these are problems of Sunak’s own making. But they make it much harder for him to claim his government is making a fresh start.