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A careless Chancellor

While we are unlikely ever to know the full details, we do know that a serving chancellor of the exchequer negotiated a settlement with HMRC, and later admitted that he had been careless with his tax affairs

How the story unfolded

Dan Neidle, former UK head of tax at Clifford Chance and now running a not-for-profit policy company Tax Policy Associates, carried out a lot of detailed analysis back in July 2022. His first substantive post was published on 10 July, a few days after Mr Zahawi became chancellor. In it, he notes that a substantial part (42.5%) of the shares in YouGov, which Mr Zahawi co-founded in 2000, were held by a Gibraltar company, Balshore Investments Ltd, which in turn was owned by an offshore trust apparently controlled by Mr Zahawi’s parents.

The shares of YouGov were sold, in three disposals of which the main one was in 2017. The key issue which Neidle highlighted was: ‘If Zahawi had held the shares directly, he would have paid about £3.7m of capital gains tax when they were sold in 2017. So – unless there is an innocent explanation I am missing – £3.7m of tax was avoided.’

Vigorous denials followed (together with threats to sue Neidle for libel) including the statement (on 24 August 2022) that Mr Zahawi’s taxes ‘are fully declared and paid in the UK’.

Matters then went relatively quiet. Mr Zahawi stepped down as chancellor on 6 September 2022.

And then, on 14 January 2023, The Sun on Sunday ran the story that ‘Nadhim Zahawi agrees to pay several million in tax’. On 18 January, Mr Zahawi provided a statement to BBC’s Newsnight that his tax affairs ‘were and are fully up to date’.

In a further statement issued on 21 January 2023 (reported by the BBC, see, Mr Zahawi confirmed that ‘when I was being appointed Chancellor of the Exchequer, questions were being raised about my tax affairs’. He also said that HMRC concluded that he had made a ‘careless and not deliberate’ error. Meanwhile, The Guardian reported (20 January) that it understood that HMRC applied a 30% penalty to the £3.7m of tax due.

‘Extraordinary and unprecedented’

What is ‘extraordinary and unprecedented’ (to use Robert Peston’s words) is that it is now clear that, during the two months that he was chancellor, Mr Zahawi was negotiating a settlement with HMRC for an error which he has now agreed was careless. Although HMRC is a non-ministerial department (deliberately, so that it can carry out independent reviews of politicians’ tax affairs), having to negotiate a settlement with the current chancellor must have been an extremely difficult task for HMRC’s senior team.

The apparent level of penalty (which has not been confirmed or denied by Mr Zahawi) is also interesting. Given that the error has been agreed as ‘careless’, the first point is that it seems very likely that the disclosure made to HMRC was not ‘unprompted’: in other words, it was made in response to questions from HMRC and not wholly voluntarily. The range of penalty for an unprompted error is 0% to 30%, and in many cases HMRC would agree to a zero penalty where full disclosure and cooperation have been given.

Secondly, even if a careless error has been made, the taxpayer will not be liable if he took proper advice, and the error was that of his advisers. In order to have such a ‘reasonable excuse’, the taxpayer needs to show that he engaged an adviser that he reasonably believed to be competent, gave the adviser full information and followed his advice. Even a highly qualified taxpayer can benefit from this route: in the case of P Cannon v HMRC [2017] UKFTT 859 (TC), a tax barrister specialising in one area of tax was held to have taken reasonable care despite making errors on other taxes. It therefore seems possible, if surprising, that Mr Zahawi did not take appropriate professional advice in 2017/18.

The level of penalties for a prompted careless error is 15 to 30% of the tax at stake (see HMRC’s Compliance Handbook at CH82470). If, indeed, the penalty levied in this case was 30%, then no deduction at all was given for the quality of the disclosure made – which would, in my experience, be highly unusual. However, if the error related to an ‘offshore matter’ (which seems likely, given that a Gibraltar company and offshore trust were involved) then the potential penalty is increased to 45% of the tax at stake (see CH116600; note that Gibraltar is a Category 2 country). A reduction from 45% to 30% would seem more realistic, but in any case, Mr Zahawi has apparently said that the issue was a UK one, so it appears that he may have accepted the maximum 30% penalty in order to achieve a settlement.

Not deliberate?

A number of people have queried why HMRC did not treat this as ‘deliberate’ conduct. In order for them to do so, they would have had to prove that Mr Zahawi had deliberately understated his tax, rather than making a careless error. The standard of proof is high, and as Nick Macpherson, former permanent secretary to the Treasury, said on Twitter: ‘HMRC’s job is to maximise revenue while minimising cost. Proving error is “deliberate” rather than “careless” is difficult, time consuming and expensive. So understandably HMRC do the deal and move on.’

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This article was originally published in the Tax Journal.

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