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Nadhim Zahawi speaking to G7 Finance Ministers as Chancellor in September 2022
HMTreasury_Zahawi

Zahawi: What level of tax trouble is he in?

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Nadhim Zahawi, the former Chancellor and current Conservative Party chairman, has reached a £5m tax settlement with HMRC which included a penalty, said to amount to around 30% of the tax due.

23rd Jan 2023
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Nadhim Zahawi has been the Conservative MP for Stratford-on-Avon since 6 May 2010. We expect the individuals who make our tax laws to abide by them, so it is shocking that a serving MP has been required to pay such a large amount to HMRC for a past tax bill, including a penalty.  

However, at the time the settlement with HMRC was being negotiated (July to September 2022) Zahawi was also Chancellor of the Exchequer, appointed by the then Prime Minister, Boris Johnson. As head of HM Treasury, Zahawi was in charge of the department that he (or accountants on his behalf) were negotiating with.  

As Dan Neidle, the founder of Tax Policy Associates, commented: “The phrase 'conflict of interest' seems insufficient."

Where did it all start?

In 2000, long before he became an MP, Zahawi set up a polling company (YouGov) with Stephen Shakespeare.

As the founders of the company you would expect Shakespeare and Zahawi to hold the majority of the shares, and indeed Shakespeare held 42.5% while another director (Bruce Copp) held 15%, but Zahawi held none. The remaining 42.5% of the shares were held by Balshore Investments Limited, a company incorporated in Gibraltar, which was established around the same time.

In July 2022 Dan Neidle explored the relationship between Zahawi, his parents, Balshore and an unnamed offshore trust. Neidle included in his blog links to all the relevant Companies House filings and other publicly available documents.

Neidle pointed out if Zahawi had held the YouGov shares directly, he would have paid about £3.7m of capital gains tax when balance of those shares were sold between 31 July 2017 and 31 July 2018.

Why use offshore entities?

A UK resident and UK domiciled person would achieve no tax advantage by using an offshore trust, or an offshore company to hold UK shares. However, a non-domicile and non-resident person potentially could, if the structures were set up carefully and managed outside of the UK.

Zahawi was born in Iraq to Iraqi parents and moved to the UK as a child. He is a UK citizen, UK resident and UK domiciled, but his parents are not. From 2010 members of the House of Commons (MPs) have been deemed to be resident and domiciled in the UK for the purposes of income tax, inheritance tax and capital gains tax under the Constitutional Reform and Governance Act 2010, part 4.

Zahawi’s argument has been that his father took some founding shares in YouGov in exchange for capital to set up the business and some business advice.

How did the tax land on Zahawi?

The missing link is how the tax bill has landed on Zahawi, and the clue appears to be in the structure of the offshore trust. We can’t know for certain, as the details of the tax settlement between Zahawi and HMRC are private, as they should be.

On the BBC radio 4  Today programme (from 49m), Barrister Emma Chamberlain, the UK’s leading expert in offshore trusts, suggested that HMRC may have held that Zahawi was the settlor of the trust. As Zahawi was domiciled in the UK any gains made by the trust would be chargeable on him, even if he was not named as beneficiary of the trust.

Penalty issue

The Guardian reported that the penalty was set at 30%, and the total settlement value was £4.8m. This would tie into the amount of unpaid tax that Neidle estimated was due of £3.7m. 

Zahawi has admitted that his tax settlement included a penalty, but not the amount or level it was calculated at. However, in his statement he said that HMRC agreed that his tax error was “careless and not deliberate”.

Retired tax partner Heather Self analysed the penalty issue on twitter.

We know Zahawi made a formal contract with HMRC (the settlement) which included an acknowledgement that he paid the wrong amount of tax in the past.

The transactions at the core of this settlement appear to be the disposal by the Gibraltarian company of YouGov shares in 2017/18, although there were earlier disposals in 2006 and 2008. The penalty regime changed from April 2016 for offshore matters. Gibraltar is a category 2 territory where the penalty structure for tax mistakes is as shown in the table:      

Category 2 Territory

Reason behind inaccuracy or error

Unprompted disclosure

Prompted disclosure

Maximum penalty Minimum penalty Maximum penalty Minimum penalty
Careless 45%  0% 45% 22.5%
Deliberate but not concealed 105% 40% 105% 62.5%
Deliberate and concealed 150% 55% 150% 85%

 

Nimesh Shah, CEO Tax at Blick Rothenberg, has commented that Zahawi’s advisers achieved a very good deal for him negotiating the penalty down to 30%, as it could have been a lot worse.  

Shah also notes that a penalty at that level suggests that HMRC were already investigating Zahawi’s tax affairs before the error was discovered, so the matter appears to have been a ‘prompted’ disclosure. 

What happens next?

The tax story is almost certainly over, the outstanding tax, penalty and possibly interest have been paid.

However, the political story has a way to run yet. The affair has damaged Zahawi’s personal reputation and also that of the Conservative Government as Zahawi has a seat in the Cabinet.

The collateral damage may also extend to the Prime Minister who appointed Zahawi Chair of the Conservative Party. It was announced on Monday that Prime Minister Sunak has asked his independent ethics adviser to look into Zahawi’s tax affairs, and provide advice as to whether Zahawi has been compliant with the Ministerial code.  

Will Zahawi resign as his position as Party chair – very likely.

Could he be forced to stand down as an MP and trigger a by-election – unlikely, but he will probably stand down at the next general election.

Replies (30)

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By Justin Bryant
23rd Jan 2023 13:08

"Barrister Emma Chamberlain, the UK’s leading expert in offshore trusts"

James Kessler KC, Giles Clarke and many others might argue with that one. That said, this is very basic stuff (ToAA - s720 ITA 2007 and ss 86, 87 TCGA 1992) and would be known to pretty much any tax lawyer.

BTW, I believe I broke the NZ story here on Aweb (citing DN et al, who of course actually broke the story period).

https://www.accountingweb.co.uk/any-answers/interesting-re-nz

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By Hugo Fair
23rd Jan 2023 13:15

"The missing link is how the tax bill has landed on Zahawi, and the clue appears to be in the structure of the offshore trust. We can’t know for certain, as the details of the tax settlement between Zahawi and HMRC are private, as they should be."

So this isn't a story, just a series of suppositions whose relationship to the truth is unknown ... but, hey, this is just journalism innit?

Either way, I hope Zahawi's accountants' PII is fully up-to-date!

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Replying to Hugo Fair:
the sea otter
By memyself-eye
23rd Jan 2023 13:38

Not sure his accountant's need worry - like many IR35 cases, HMRC comes up with its' own interpretation of 'facts' after the fact (and ignoring the law).
I suspect he chose to settle without a fight because he is so politically exposed.

Not that that will help him much.

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By paul.benny
23rd Jan 2023 13:58

Well worth reading Dan Niedle's own summary of the timeline at https://www.taxpolicy.org.uk/2023/01/19/zahawi_story/ (Credit to Justin Bryant for posting link in his own thread).

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Replying to paul.benny:
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By Justin Bryant
23rd Jan 2023 14:15

It could have been a lot worse for NZ. See:

"There are 3 criminal offences relating to offshore income, assets and activities. They were introduced in section 166, Finance Act 2016 and apply from 6 April 2017....The offences apply if you fail to declare offshore income or gains and this results in more than £25,000 of tax due. They do not require proof of intent."

https://www.gov.uk/guidance/offshore-tax-evasion-offences-relating-to-of...

"At some point between 31 July 2017 and 31 July 2018, Balshore sold its remaining stake – Balshore is not listed as a major shareholder in the YouGov 2018 annual report (compare page 52 here with page 56 here)4. My assumption is that Balshore sold all its shares5 – this will have yielded at least £20m"

https://www.taxpolicy.org.uk/2022/07/10/zahawi/

So no wonder he was keen to settle with HMRC.

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Replying to Justin Bryant:
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By paul.benny
23rd Jan 2023 15:32

Does settlement of the tax due preclude HMRC taking criminal action for failure to declare? On the facts presented, this looks deliberate not careless (to reverse Zahawi's phrasing of it).

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Replying to paul.benny:
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By Justin Bryant
23rd Jan 2023 16:10

HMRC have settled (on the basis it's only careless), so that's clearly the end of it, but as these are strict liability offshore offences he's possibly been a bit lucky. See:
https://www.pinsentmasons.com/out-law/news/strict-liability-offence-for-...

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By ireallyshouldknowthisbut
23rd Jan 2023 14:50

And we wonder why HMRC is not allowed by its politicians to hire more tax inspectors.

Bit embarrassing when they get stuck in.

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By SteveHa
23rd Jan 2023 15:50

I would hope and expect that his name appears on the next "deliberate avoiders" list.

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Replying to SteveHa:
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By AndyJR81
23rd Jan 2023 17:13

SteveHa wrote:

I would hope and expect that his name appears on the next "deliberate avoiders" list.


Not going to be possible if HMRC has accepted an argument that it was "careless not deliberate"
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Replying to AndyJR81:
By SteveHa
23rd Jan 2023 20:30

I know, but do you believe that it wasn't deliberate. A chancellor of the exchequer should never have a defense of "careless" when it comes to tax.

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Replying to SteveHa:
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By Ian McTernan CTA
25th Jan 2023 12:39

So getting appointed immediately makes him an expert in all taxes? Amazing. I had to study for a couple of years just to get qualified and 30 years later still don't know most of it (not my fields of expertise).

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By PennyPincher
23rd Jan 2023 19:23

finally attempting to close the tax gap properly instead of mucking about with pet projects

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By More unearned luck
23rd Jan 2023 20:19

Was it an offshore matter? CGT taxes the beneficial owner. An argument that either the Gibraltar company or the trust was bare trustee for NZ would mean that the offshore ratese wouldn't apply, as we have had a straightforward gain on the sale of shares in a UK company. But that doesn't tie in with the reported 30% penalty and carelessness as the behaviour as it would mean no discount whatsoever for co-operation. The gain was reported to be about £27m. Tax of £3.7m implies some ER was given.

DN thinks it was an onshore matter, other experts, offshore.

Under the LSS it should have been all or nothing for the tax - no horse trading.

A careless penalty can be suspended, but this one wasn't, apparently.

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Ivor Windybottom
By Ivor Windybottom
24th Jan 2023 09:48

I'm not really convinced about the investigative journalism angle on this. I do hope the Revenue and the Information Commissioner's Office are taking a close look at where the data leaked from...

...however Nadhim was caught red-handed and shouldn't have tried to dodge his tax liabilities. Yet another badly advised politician. I doubt he can recover from this to continue in politics.

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Head of woman
By Rebecca Cave
24th Jan 2023 09:56
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Replying to Rebecca Cave:
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By Justin Bryant
24th Jan 2023 10:10

The clear lesson here is: don't annoy or otherwise get on the wrong side of clever tax lawyers (especially those with plenty of spare time on their hands), as their bite is probably a lot worse than their bark.

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Replying to Rebecca Cave:
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By agillies
24th Jan 2023 10:19

Would 5% x3 = 15% late penalties also apply- £555,000?. Assuming 17/18 due 31st Jan 2019 using HMRC calculator:

You paid tax or sent your return late
Key facts Your results
Your penalty for sending the return late none
What you said your tax bill was £3,700,000
Interest added for paying your bill late £457,477.12
Penalty for paying your bill late £555,000
Estimate of the total you owe £4,712,477

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By [email protected]
25th Jan 2023 10:15

Not enough info. If "30% of the settlement was penalty " as the press have reported - i.e. 30% penalty and 70% tax and interest, then the penalty loading would be at least 3/7 which is 43% of the tax.

But then the press don't understand tax and can't be relied upon to get it right.

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By trstearn
25th Jan 2023 10:48

So while HMRC are claiming 105% of a contractor colleagues income when he used a tax arrangement to escape IR35 in 2001 they are charging Zahawi around 30% penalty. His arrangement was declared on SAR, was perfectly legal at the time and only changed by retrospective tax law change S.58 in FA2008. One law for.........

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By vstrad
25th Jan 2023 10:55

Disappointing that Rebecca can't even get YouGov's co-founder's name right.

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Replying to vstrad:
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By Hugo Fair
25th Jan 2023 11:23

Ot's inly une latter wrang!

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By Trevithicks_Piston
25th Jan 2023 11:00

Prompted disclosure of carelessness?

To be fair, that's the same way the government he is part of runs the country.

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By Mr J Andrews
25th Jan 2023 11:12

We all know what happened. HMRC decided carelessness. We all know the state of HMRC.
Just 7.5% over the minimum minimum penalty seems an excellent result for Zahawi.
As if we need an ''Ethics Adviser'' . Come on Sunak - Man Up - whilst the blood of the country's compliant taxpayers boils.

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By Springfield
25th Jan 2023 12:17

So. the MP for Stratford-on-Avon had set up a company with a man called Shakespeare!

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LL
By RickyRoark
25th Jan 2023 12:28

Is this article meant to be a giant endorsement of NZ? I thought AccountingWeb was supposed to be politically neutral?

I fully commend NZ for not wanting to pay any tax over to the state and would encourage all UK citizens to do the same. Finally, a conservative leader we can all get behind!

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By Moo
25th Jan 2023 14:55

I've read quite a few articles on this, including on taxpolicy.org but I've not seen any mention of the name of the (presumably) accountants who acted for NZ.
The aggressive libel lawyers have been named several times by Dan Neidle.
It would be interesting to know who agreed the settlement with HMRC and whether they were the same firm who gave the original 'tax mitigation' advice which failed.

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By anthonystorey
25th Jan 2023 19:38

And was he being careless when he hid his identity behind a company registered in Gibraltar and an unnamed overseas trust, or was it carefully thought out and planned, and if so for what purpose if not to avoid UK tax. Personally I think we should send him back to Iraq.

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By anthonystorey
25th Jan 2023 19:38

And was he being careless when he hid his identity behind a company registered in Gibraltar and an unnamed overseas trust, or was it carefully thought out and planned, and if so for what purpose if not to avoid UK tax. Personally I think we should send him back to Iraq.

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Head of woman
By Rebecca Cave
29th Jan 2023 09:42

Zahawi has been sacked as Conservative Minister.
https://www.bbc.co.uk/news/live/uk-politics-64439757

Will he step down as an MP? - NO.
The PM has said he wants Zahawi to stay in Parliament:
"I know I will be able to count on your support from the backbenches as you continue to passionately and determinedly serve your constituents of Stratford-on-Avon and represent the many issues and campaigns you are dedicated to."
IMHO he should also step down as an MP
If his ethics aren't good enough to be a minister, then they aren't good enough to be an MP either.

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