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Analysis | Zahawi’s careless tax error is Sunak’s problem


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 gnawing revelation upsets the smooth veneer. Then the knob of awkwardness is turned up until it becomes something hideous.

Nadhim Zahawi’s tax business feels familiar. When Zahawi apologized last summer for accidentally using taxpayers’ money to heat his horse stables, it seemed harmless enough. After all, no one could have failed to notice that energy for their second home and their horse stables were on the same bill. And when, as a candidate for Tory leader, he repeatedly denied seeing anything in his tax affairs, people could have taken his word for it; Prime Minister Rishi Sunak clearly did that by appointing him chairman of the Conservative Party. Now Zahawi’s tax affairs are Sunak’s problem.

After some initial misrepresentations, Zahawi admitted over the weekend that Britain’s tax authority, HMRC, concluded that he had been “negligent and unintentional” on his tax return and that he had paid to settle the case – reportedly to the tune of £5m (£5m). $6.2 billion). ), including a 30% penalty. Carelessness can mean many things; say, forgot to put the garbage cans out on the collection day. But in tax terms, it has connotations that Zahawi tried to obscure with carefully worded denials. After initially backing his minister, Sunak – who came to power on a promise of “integrity, professionalism and accountability at every level” – ordered an ethics inquiry after admitting he did not have all the information.

Zahawi is impressive in every way. An immigrant of Kurdish descent 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 series of increasingly important government positions under four prime ministers. In short, Zahawi is the kind of person many Brits would like to see rise to high office.

He proved largely adept there too, drawing praise as vaccines minister during Covid. He called for Boris Johnson to resign 48 hours after his appointment as Chancellor of the Exchequer. He then backed Johnson’s return after Liz Truss’ premiership imploded, before moving on to Sunak, who appointed him to his current post – not a top cabinet job, but important enough ahead of the election.

It’s hard to see how he can last in that capacity for long. While Zahawi was not charged with “intentional” misreporting, which could lead to prosecution (as in the case of ex-Formula 1 boss Bernie Ecclestone), a finding of carelessness here also has specific meaning. In HMRC jargon, the agency considers “what the person has done or failed to do and whether a prudent and reasonable person would or would not have done so in those circumstances.”

Zahawi’s quiet settlement with HMRC, apparently during his short time as chancellor, concerns profits from the sale of shares in YouGov, the polling station 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 “Nadhim Zahawi’s family trust” in YouGov’s 2009 annual report. The stake was eventually sold in the 2017-2018 tax year for around £27m.

As with many offshore arrangements, several holding structures appear to have been involved. Unusually, Zahawi himself claimed no founder shares when YouGov was founded. Instead, he explained, shares were allotted to his father in exchange for “some capital and his invaluable guidance”.

Former Clifford Chance tax attorney Dan Neidle, who founded the nonprofit Tax Policy Associates, began looking 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 seed money and little evidence of the valuable guidance Zahawi claimed. He suspected that Zahawi had benefited from gifts and unsecured loans, which should be taxable.

The burden of proof is on HMRC to prove its allegation of “carelessness”; it has lost in the courts where it has not provided sufficient evidence. If the blame for the error is then placed on an agent or tax adviser, the taxpayer must demonstrate that it has taken reasonable steps to avoid any inaccuracies. The fact that Zahawi had to pay fines suggests that no such defense was offered or accepted, although Zahawi was clearly keen to resolve the matter without public strife.

In fact, there are many questions about these schemes that may not be answered. But the inquiry ordered by Sunak is about the ‘ethics’ of his actions, not HMRC’s calculations or conclusions. That hardly seems to require any investigation. His own statements and legal letters to Neidle and journalists raising valid questions about his tax returns suggest that conduct falls short of Sunak’s own minimum standards of integrity and accountability.

Even if the ethical bar is somehow raised by the investigation, the political damage is already significant. Investigation is often seen as a deferral (Deputy Prime Minister Dominic Raab is under investigation for bullying allegations, but continues). In Zahawi’s case, it probably just makes things worse. It gives Labor a bruise to strike. On Wednesday, Labor leader Keir Starmer called Sunak “hopelessly weak” for not acting more decisively.

Journalists have already delved into other elements of Zahawi’s private affairs, making him an awkward choice to be the face of a conservative party that must appeal to poorer voters in the north and recover from a series of scandals (remember Partygate?) that suggest this is an elite who plays by different rules. It also makes it impossible for Sunak to focus on his government agenda when fighting ethical fires.

Meanwhile, voters are regularly reminded of the kind of sordid stories Sunak hoped to leave behind. A parliamentary committee is investigating whether Johnson deliberately misled parliament about Partygate. And this week, an investigation into the appointment of Johnson friend and Conservative donor Richard Sharp to the position of BBC chairman was announced after it emerged that Sharp, while a candidate for the job, had introduced Johnson to a wealthy Canadian (and distant nephew of Johnson’s) who guaranteed a personal loan of £800,000. As a sign of how cozy things are getting 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 more difficult for him to claim that his government is making a fresh start.

More from Bloomberg’s opinion:

• What does Sunak stand for? His party must know: Martin Ivens

• Can Sunak hold out against the latest Brexit holdouts?: Therese Raphael

• American and British Conservatives are frozen in failure: Clive Crook

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Therese Raphael is a columnist for Bloomberg Opinion on healthcare and British politics. She was formerly editor-in-chief of the Wall Street Journal Europe.

More stories like this are available at bloomberg.com/opinion

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