Zahawi scandal illustrates no one is beyond reach, despite tax system complexity

Nadhim Zahawi has been sacked as Conservative party chairman following an investigation by the Prime Ministers ethics adviser, showing a “serious breach of ministerial code”.

The inquiry, led by Sir Laurie Magnus, found that Zahawi failed to disclose an HMRC investigation of his tax affairs. Following the findings, Rishi Sunak wrote to Zahawi to announce his sacking as Tory chairman.

It is reported that Zahawi paid a penalty as part of a £4.8m settlement with HMRC.

“The fact that Nadhim Zahawi has received a penalty suggests that no one is beyond reach, “says Neil Berry, tax partner at Macintyre Hudson.

“If the penalty was appropriate for the error concerned, and HMRC decided that to be the case, I think we can be assured that the system works and HMRC treats everyone, regardless of position in society, fairly.” he adds.

Tim Walford-Fitzgerald, private client partner at HW Fisher agrees and believes situations like this, where mistakes are being “pursued and corrected”, should give faith to the UK public in the tax system.

Fitzgerald adds: “it must be hoped that the increased information becoming available to HMRC will not only allow them to continue to correct errors but also reinforce their efforts in dealing with deliberate criminal evasion.”

The MP for Stratford-on-Avon’s current dispute stemmed from a tax bill over the sale of shares in YouGov. The shares were held by Balshore Investments, a company registered offshore in Gibraltar with links to Zahawi’s father and his family.

Zahawi has stood firm throughout the scrutiny, saying he acted properly, and any error found was “careless and not deliberate.”

Berry suggests that the point in issue was not particularly clear in legislation and “that uncertainty was perhaps what the family sought to take advantage of.”

Walford-Fitzgerald acknowledges how long and complicated the UK tax system is with legislation supplemented by decades of case law and HMRC interpretation and practice. And with this in mind, he believes it is “relatively easy” to make an error in tax affairs.

“Any mistake can only be innocent if reasonable care has been reached in the filing position” he notes.

“Any question of whether a mistake is innocent, careless or deliberate reflects this complex reality.”

Zahawi claims he gave the shares to his father because he was an original investor in YouGov and was entitled to them.

The PM will face further questioning by opposition parties as to why he did not act sooner.  The Liberal Democrats have gone a step further and called on Zahawi to step down as MP for Stratford-on-Avon.

Complexity of the tax system 

Berry has confidence in the tax system and feels the only issue with HMRC is that they seem to be “grossly” understaffed.

Tax legislation has expanded rapidly over the last two decades and Berry says this expansion has created considerable complexity.

“That complexity creates uncertainty over the application and outcomes of that legislation,” he adds.