Good morning. The story of Nadhim Zahawi’s taxes has been rumbling on for months; now it may have finally come to a head.
After the Guardian revealed on Friday that Zahawi’s settlement of an HMRC tax bill worth millions included a seven-figure penalty, the Conservative party chairman and former chancellor gave his version of events – and said that his error was “careless and not deliberate”.
But after foreign secretary James Cleverly endured a torrid interview round defending Zahawi yesterday (and said that he was not fully informed about the story in part because he had been “having a bit of a rest and doing some shopping on Saturday”), pressure on the government continues to build. Now Rishi Sunak is facing calls for him to explain what he knew about Zahawi’s affairs when he appointed him to the cabinet.
With continuing questions over whether Zahawi’s position is tenable, it’s easy to write off the substance of his taxes as too complicated to make sense of – but you can’t reach a judgment on the story without understanding them. Today’s newsletter is a straightforward explanation of the fundamentals of the Zahawi saga, designed to arm you to follow whatever happens next.
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Five big stories
Trade | Britain will be 15 years late in achieving its £1tn annual export target after trade was hit by Brexit, internal government forecasts show, with the total due to fall to £707bn next year. The target was supposed to be reached in 2020, but is now not projected to be reached until 2035.
Ukraine | Germany would not “stand in the way” of Poland sending Leopard tanks to Ukraine, foreign minister Annalena Baerbock, has said, in what appeared to be the clearest signal yet from Berlin that European allies could deliver the German-made hardware.
US news | Ten people have been killed in a mass shooting after a lunar new year festival near Los Angeles. Police say the suspected shooter, a 72-year-old man, died from a self-inflicted gunshot wound. The motive was “not clear”.
UK politics | Boris Johnson has denied any conflict of interest over his role in appointing a new BBC chairman after it was reported that Richard Sharp helped him secure an £800,000 loan guarantee. A spokesperson for Johnson, who was on a surprise visit to Ukraine, denied any wrongdoing after Sharp allegedly helped arrange the credit facility during the recruitment process.
Obituary | Ian Black, the Guardian’s former Middle East editor, has died peacefully at the age of 69 surrounded by his family. Black was diagnosed with a rare neurological disease in August 2021. Channel 4 News’ international editor Lindsey Hilsum described him as “a great journalist and gentleman”.
In depth: The complicated story of Nadhim Zahawi’s tax bill
Before he was a politician, Nadhim Zahawi rose to prominence as one of the co-founders of YouGov, a polling company.
When YouGov got started in May 2000, a Gibraltar-based company, Balshore Investments Limited, was allocated shares equal in value to those given to Zahawi’s co-founder Stephan Shakespeare – 42.5%.
Zahawi took no shares himself. Balshore was held by a trust controlled by Zahawi’s parents; he has said that the shares went to Balshore in recognition of his father’s role in setting up YouGov through the provision of start-up capital and advice.
The first YouGov share issuance from 2000 says that another founder, Neil Copp, provided £287,500 of capital and received 15% of the shares. YouGov’s records suggest that Zahawi’s father provided £7,000 to the company two years after it was founded. When the Times spoke to people involved in YouGov at the start (£), none could recall Zahawi’s father being involved.
YouGov was highly successful, and as well as attracting dividends, the stake in the company owned by Balshore was eventually sold by 2018 for around £27m. If Zahawi was the beneficiary of that transaction, he would owe tax on it. A 2005 document suggested that he benefited from the trust on at least one previous occasion, when Balshore at least partially covered a £99,000 loan he had received from YouGov.
The central questions are these:
Did the work done by Zahawi’s father at YouGov’s founding truly merit such a large proportion of the initial shares?
Was the trust really controlled by Zahawi’s parents, or was the true beneficiary of the sale of Balshore’s shares in YouGov Zahawi himself?
Did Zahawi thus avoid paying capital gains tax on the sale of Balshore’s stake?
Did Zahawi give HM Revenue and Customs (HMRC) a straightforward account of his affairs when it came to investigate?
The Observer has a longer list of unanswered questions about Zahawi’s taxes and the Balshore shares.
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Why has the story become a big deal now?
Questions about Zahawi’s tax affairs date back to 2017, when the Guardian reported his links to Balshore.
In July last year, when Zahawi was appointed Chancellor by Boris Johnson, the Independent reported that his finances were under investigation by the National Crime Agency. At the time Zahawi said he was unaware of it, and the investigation was reported to have not led to any action.
Then, a few days later, the Observer reported that an HMRC “flag” was raised over Zahawi’s finances before his promotion. A source close to Zahawi said that he “does not have, and never has had, an interest in Balshore Investments and he is not a beneficiary”.
Prompted by these stories, Dan Neidle, an independent tax expert, started to go through the publicly available documents on Zahawi’s business activities. He reached the conclusion that Zahawi arranged for the shares that would otherwise have been his at YouGov’s founding to go to Balshore, and alleged that “the obvious rationale for this is tax avoidance”, a claim denied by Zahawi. Neidle noted that while Zahawi says he “is not a beneficiary” of Balshore, this is not the same as saying he never has been.
After that, as Zahawi continued to deny through his lawyers that he “set up an offshore tax structure for a tax benefit” and was moved by Rishi Sunak from the treasury to Conservative party chairman, the story went relatively quiet. But last week, the Sun on Sunday reported that Zahawi had agreed to pay several million in tax to settle a dispute with HMRC.
Then, on Friday, the Guardian’s Anna Isaac reported that a source said the settlement with HMRC included a 30% penalty on top of an estimated tax bill of £3.7m. The total sum including the penalty and interest charges, apparently on the sale of multiple tranches of YouGov shares worth more than £20m, was reported to be more than £5m.
That report led to Labour saying on Saturday that Zahawi’s position as Conservative party chair was “untenable” and that Rishi Sunak should sack him. Yesterday, the Sun on Sunday reported that Zahawi was denied a knighthood after officials contacted HMRC “as part of the normal due diliegnce”.
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What has Zahawi said?
When stories about his tax affairs surfaced last summer, Zahawi described them as “smears”. His lawyers wrote to Neidle [pdf] via email last July demanding he withdraw his allegations and saying that he is “not entitled to publish [the email] or refer to it”, a condition Neidle had already said he would not accept. Last week, the Independent published exchanges with Zahawi from the same period in which he threatened legal action three times.
On Saturday, he took a different approach, with a carefully worded statement that he said he was making to “address some of the confusion about my finances”. He reiterated that his father “took founder shares in the business in exchange for some capital and his invaluable guidance” and said that HMRC had accepted he was entitled to do so – but that “they disagreed about the exact allocation”. Because of this “careless and not deliberate” error, he said he paid what was due “so that I could focus on my life as a public servant”. He did not confirm a figure.
He also said that he resolved the matter between being appointed as Chancellor and moving to be party chair. That implies that he reached a settlement with HMRC while Chancellor – and overnight, Sky News reported that he had indeed done so, a situation which critics suggest created a conflict of interest.
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What does ‘careless’ mean?
One important point arising from Zahawi’s statement that unpaid tax on a benefit worth more than £20m was viewed by HMRC as “careless and not deliberate” is what exactly that phrase means.
While a plain English reading might suggest that it means he simply made an error, Dan Neidle told the BBC that the meaning in tax law is more complicated, and may be a designation settled on by HMRC if it concludes it cannot prove deliberate tax evasion.
“‘Careless’ has a very specific meaning,” he said. “‘Careless’ means that you weren’t just wrong, you’re allowed to get your tax wrong … it works like this: You or I, as long as we instruct a proper adviser, we give that adviser the right information, we follow that adviser’s advice, and we check that final tax return to the best that we’re able to, so long as we do that, even if it was completely wrong … we won’t pay penalties. To pay a 30% penalty, you didn’t do one or more of those things.”
What else we’ve been reading
In Saturday magazine, Tom Lamont toured the British towns and villages with fantastically filthy placenames. From Twatt to Shitterton via Three Cocks and Wetwang (above), it’s a delight. As a woman who petitioned for one entertainingly-titled road to keep its name told him: “In a way, if we lose Bell End, we lose everything.” Archie
Lauren John Joseph tells the heartbreaking and poignant story of a friendship that underwent the immense pressure of loving and losing the same person. Nimo
There is plenty of research that shows that a four day work week tends to be better for employees, employers and society in general. Despite the inevitable drawbacks, Richard Godwin concludes that ultimately it has been the best for him. “Both work and care are pleasurable and fulfilling,” Godwin writes, “as long as you are able to apply your full self to them”. Nimo
Sarah Haque’s essay for The Fence about her adolescence at an all-girls school is a sad, evocative, affectionate account of a time in life when she learned that the male gaze is inescapable, and “female love is love on acid”: “we’d ache to redo it, now, knowing what we know.” Archie
In this insightful piece, Elle Hunt spoke to eight people from various industries about why they are going on strike, putting names and faces to the people who keep the country running. Nimo
Sport
Premier league | In a helter-skelter clash, Arsenal defeated Manchester United 3-2 to maintain a five-point lead at the top of the Premier League table. Jonathan Liew wrote that “there is not a better or more complete team in England” than Mikel Arteta’s side, adding: “Arsenal will be champions”. Meanwhile, an Erling Haaland hat-trick led Manchester City to a 3-0 victory over Wolves, and Leeds drew 0-0 with Brentford.
Tennis | 22-year-old American player Sebastian Korda’s victory against Hubert Hurkacz, earned him his first grand slam quarter-final. Korda is hoping to match his father, Petr, who won the 1998 Australian Open.
NFL | The Cincinnati Bengals are one win from the Super Bowl after overwhelming the Buffalo Bills by 27-10 in heavy snow, advancing to their second straight AFC championship game, where they will play the Kansas City Chiefs. Meanwhile, the San Francisco 49ers beat the Dallas Cowboys 19-12 and will play the Philadelphia Eagles in the NFC title game.
The front pages
The Guardian covers a new report from the Department for International Trade under the headline “Britain forecast to reach £1tn export target 15 years late in wake of Brexit”. The latest on Nadhim Zahawi also makes the front page. Meanwhile, the Financial Times says “Eurozone to avoid recession in 2023 as energy prices and China boost outlook”.
The i reports “Energy firms hit back at prepay meter ban with threat of higher bills”, while the Telegraph says “National Grid ready to pay customers to switch off”.
Under photos of Nadhim Zahawi, Rishi Sunak and Boris Johnson, the Mirror runs the headline “They still don’t get it”, with a story on their recent scandals.
The Times has an investigation into what it claims are “Universities ‘risky’ ties to China”. The Mail leads with “Shocking rise of ‘something for nothing Britain’”, while the Sun reports on the “BGT pay war”.
Today in Focus
Exposing rainforest carbon credits: why offsetting isn’t working
Companies across the world rely on carbon offsetting credits as a way to display their green credentials, but a Guardian analysis of scientific studies has found that many rainforest carbon credits are worthless. Patrick Greenfield, the biodiversity reporter for the Guardian’s Age of Extinction project, tells Michael Safi why we should not rely on such credits to tackle the climate crisis.
Cartoon of the day | Edith Pritchett
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The Upside
A bit of good news to remind you that the world’s not all bad
The Yaq̓it ʔa·knuqⱡi ‘it (YQT), an Indigenous community in south-eastern British Columbia, have signed a landmark agreement with a mining company that would give them veto power over extraction projects. For years Indigenous leaders have had a fractured relationship with powerful energy companies, protesting pipelines and demanding to have a greater say or even full control over resource projects that affect their territories. Under this new deal that relationship will change, as the YQT become the “regulator and reviewer” of the proposed US$300m Crown Mountain project, giving them unprecedented autonomy and power over their lands.
This deal with the YQT comes at the same time as another historic agreement in Canada between the Blueberry River First Nations and the province of British Columbia, which would guarantee protections to wildlife, end logging in old-growth forests and offer compensation to the communities.
Sign up here for a weekly roundup of The Upside, sent to you every Sunday
Bored at work?
And finally, the Guardian’s crosswords are here to keep you entertained throughout the day – with plenty more on the Guardian’s Puzzles app for iOS and Android. Until tomorrow.
