UPDATE: this was written right after Zahawi issued his statement on 21 January. The timeline in that statement is contradicted by Sir Laurie Magnus’ conclusions in his letter to the Prime Minister, but I won’t update this piece. Suffice to say that it’s now clear Zahawi knew he had a serious tax problem well before he became Chancellor in July 2022 and, when I started analysing the Balshore structure that same month, it seems likely that HMRC were well ahead of me.
The Telegraph is carrying a statement from Zahawi.
I gave an interview to BBC Breakfast this morning:
And the following is my detailed response, and reflects discussions with other tax experts – tax solicitors, KCs, tax accountants, and retired HMRC officials.
My commentary on the statement
As a senior politician, I know that scrutiny and propriety are important parts of public life. Twenty-two years ago, I co-founded a company called YouGov. I’m incredibly proud of what we achieved. It is an amazing business that has employed thousands of people and provides a world-beating service.
I agree. YouGov, and Zahawi’s role in founding it, is an amazing British success story. He should be proud of it.
When we set it up, I didn’t have the money or the expertise to go it alone, so I asked my father to help. In the process, he took founder shares in the business in exchange for some capital…
The “some capital” is a lie. It’s backing down from his initial claim that “startup capital” was provided – it’s now merely “some”. But it’s still not true. The facts are that his father/Balshore provided no capital at the time, and paid a nominal £7,000 two years later (with a Companies House form backdated – and by 2002, £7,000 was a triffling amount to the company). When I first called this a lie, Zahawi’s lawyers threatened to sue me for libel. When I pointed out the backdated form, they went silent, and never responded on the point. I don’t understand why Zahawi continues to raise a point that even his lawyers backed away from.
… and his invaluable guidance.
This was Zahawi’s fallback explanation, after I disproved the “capital”. The problem is that it contradicts all the published history of YouGov, everyone The Times talked to, and was denied by YouGov itself (in an official statement given to The Times). I wrote more about this here.
Twenty-one years later, when I was being appointed Chancellor of the Exchequer, questions were being raised about my tax affairs. I discussed this with the Cabinet Office at the time.
Following discussions with HMRC…
The timeline jumps here. It misses the small detail of me saying I thought he’d failed to pay £3.7m in tax, him sending lawyers to threaten me and half of Fleet Street with libel writs, and him issuing denials that anything was wrong.
When exactly did he realise that I was right, his denials were wrong, and approach HMRC?
It also misses the timeline of when the “taxable event” happened – the thing that resulted in him having the large tax bill. This was either all or almost-entirely-all much more recent than twenty-one years ago. The big gain on the YouGov shares was in 2017/18. This is not ancient history – it’s when Zahawi was a successful and wealthy man, who you would expect to have very competent tax advisers.
The tax return for 2017/18 was due by 31 January 2019, and could have been amended to reflect the disposal at any time up to 31 January 2020 (assuming it was not filed late). So we are talking about events of only 3-4 years ago.
… they agreed that my father was entitled to founder shares in YouGov, though they disagreed about the exact allocation.
Unclear quite what that means – it goes to the technical basis for taxing him. Obviously, his father was “entitled” to the shares, because he owned them, as a result of Zahawi’s generous decision in 2000 to arrange for YouGov to issue them to Balshore for free.
Perhaps this is suggesting the arrangement was a settlement, with Zahawi a beneficiary as to x% and his father to y%? But that’s a point of technical detail which goes down a long rabbit hole, and I won’t go further into here. The various technical ways in which Zahawi could have been taxed are fascinating, but which one was actually used doesn’t affect my conclusions – it’s also possible the neither HMRC nor the settlement needed to conclude this, and just stated an amount.
They concluded that this was a ‘careless and not deliberate’ error.
If it was deliberate, he’d be prosecuted for criminal tax evasion. HMRC “concluding” it wasn’t criminal isn’t a ringing endorsement.
“So that I could focus on my life as a public servant, I chose to settle the matter and pay what they said was due, which was the right thing to do.
This implies it was some obscure technical point, which could have gone either way, and he chose to pay up. That isn’t what happened. 30% penalties don’t get charged for being on the wrong side of obscure technical points. He was “careless”.
What does that mean? Well, it’s easy to not be “careless”: instruct proper advisers, give them all the information relevant to your tax return, follow their advice, and check your tax return (as best as you reasonably can). Then, even if your advisers turn out to have been complete idiots, the law and HMRC will agree that you weren’t careless.
So we now know for a fact Zahawi didn’t do this.
We can’t know for sure what went wrong but, under the circumstances, my view (and that of most other experts I’ve spoken to) is that the most likely scenario is that he received somewhere around £27m, didn’t obtain proper advice, and didn’t declare it to HMRC.
That settlement almost certainly contained a written admission by Zahawi of default – that he had failed to meet his obligations. That is HMRC standard practice, published here.
Additionally, HMRC agreed with my accountants that I have never set up an offshore structure, including Balshore Investments
Games with words. We know his father set it up.
We know Zahawi likes these games. When The Sun reported the story, he said he didn’t have “lawyers” negotiating the settlement with HMRC. He now admits there was a negotiated settlement, but it was actually “accountants”.
I regard these kind of games as an attempt to deceive – as a lie – and I expect most people in and outside politics will have a similar view.
and that I am not the beneficiary of Balshore Investments.
More games. Balshore Investments is a company. Nobody is a beneficiary of Balshore Investments.
The question is: is he a beneficiary of the trust? He has denied this in the past. His lawyers denied it to me as recently as 1 December 2022. There’s clear evidence it’s not true, and that he received a gift from Balshore on one occasion. By sheer luck, a corporate goof meant that this was disclosed in the YouGov 2005 IPO papers. It seems likely there were other gifts. Perhaps these are more games, and Zahawi is using “beneficiary” in a way I do not understand.
This matter was resolved prior to my appointments as Chancellor of the Duchy of Lancaster and subsequently chairman of the party I love so much. When I was appointed by the Prime Minister, all my tax affairs were up to date.
If true, this means he negotiated and signed a settlement with HMRC when he was Chancellor of the Exchequer. The phrase “conflict of interest” seems insufficient.
When Winston Churchill was Chancellor, he famously summoned the Chairman of the Board of the Inland Revenue, and had him devise a tax avoidance scheme to convert his income into capital, so it escaped tax (there was no CGT at the time). Times have changed. And Zahawi, whilst an impressive figure in many ways, is not Churchill.
Key outstanding questions
- When did Zahawi become aware he had unpaid tax, and how? Was it sparked by my July report?
- Why did he respond to me, and others reporting on his tax affairs, with libel threats rather than simply saying there were questions he was looking into?
- What were the income/gains on which he is taxed? My expectation is that this is around £27m originating in Balshore’s gain on the YouGov shares, returned in some form – directly or indirectly – to Zahawi.
- If that’s right, why did he repeatedly deny benefitting from Balshore and the trust?
- Why didn’t he declare the £27m (or whatever the precise figure was) to HMRC? It was a huge figure. About a third of his net wealth at the time.
- When did he/his advisers approach HMRC for a settlement?
- If it was at a time when he was Chancellor, how was the obvious conflict of interest declared and handled?
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Was the settlement under COP 9 – the procedure where HMRC suspects tax fraud? This can end in a contractual settlement of precisely the kind Zahawi entered into, i.e. if HMRC conclude they suspect but can’t prove fraud.Osborne Clarke, Zahawi’s lawyers, have told me that HMRC did not apply COP 9. - In the experience of advisers who work in this area, a 30% penalty implies Zahawi and his advisers did not provide full and complete cooperation. Why was that?
- Settlements usually contain a written admission by the taxpayer that they had failed to meet their legal obligations – i.e. that their taxes were, prior to the settlement, in default. Did his?
- If it did, then why has he repeatedly said that he has always reported, and paid, the tax that is due?
- When was the settlement finalised?
- Why did he attempt to mislead The Sun, by saying he didn’t have “lawyers” negotiating the settlement?
I’m ignoring the many technical questions about the nature of the arrangement and how it was taxed – they’re less important now. I’m also ignoring some of the other questions around Mr Zahawi’s tax affairs, in particular the £30m unsecured loans into Zahawi & Zahawi (the company established by Nadhim and his wife, and now solely in her name). The loans come from an unknown party – but the nature of these loans means its likely someone closely connected to him.
Comment policy
This website has benefited from some amazingly insightful comments, some of which have materially advanced our work. Comments are open, but we are really looking for comments which advance the debate – e.g. by specific criticisms, additions, or comments on the article (particularly technical tax comments, or comments from people with practical experience in the area). I love reading emails thanking us for our work, but I will delete those when they’re comments – just so people can clearly see the more technical comments. I will also delete comments which are political in nature.
11 responses to “What the Zahawi statement tells us, and what we still don’t know”
I came across this wonderful site by asking Google who Zahawi’s accountants were. I haven’t followed all your links but I have been reading for a couple of hours and despite you mentioning his accountants I still don’t know who they are. Forgive my ignorance but is there an unwritten law that accountants remain unnamed?
no, he could absolutely name them.
So why aren’t they named and shamed?
I’m a little puzzled by what indicates that Zaharwi/his advisors approached HMRC. The 30% penalty, if it was based on the conclusion that the error was due to carelessness, strongly indicates that no disclosure was made and I’ve not spotted anything in the various statements they’ve made that clearly suggests one.
When you say that you won’t go into technical detail as it goes down a long rabbit hole I think you’re being a bit broad brush because the technical analysis is at the heart of the matter.
It’s bog standard tax planning to utilise the non-dom status of close relatives when at all possible as it was for NZ when YG was formed. Putting shares in a trust structure settled by his non-dom father meant that if the shares were subsequently sold at a profit there would be no chargeable gain under S86 TCGA 92 because S86(1)(c) only catches domiciled settlors.
NZ could then, if he so wished, have accessed the funds in basically four ways. He could have received tax free capital payments after becoming non-resident; he could have received benefits from the trust structure such as loans or accommodation and avoided any charge by reimbursing the trust at market rates, which he seems to have done for example with the loan for the purchase of his Stratford house; he could have received and declared on his returns capital payments chargeable under either S732 ITA 2007 (if there was income in the structure) or S87 TCGA 92; or he could have received such benefits and not declared them. The latter seems unlikely to have been the basis of the settlement with HMRC as the quoted numbers are too large to be accounted for by undeclared capital payments.
Taking what NZ says at face value (which may be a stretch) it seems that HMRC argued that he had provided bounty to the Gibraltar trust by allowing it to take up founder shares that would otherwise have been allotted to him, thus making him a settlor of the trust. (S620 ITTA 2005). HMRC seems to have accepted that he was a joint settlor with his father but in what proportions we do not know. The consequence is that income and gains proportionate to the share of the bounty deemed to have provided by him become assessable on him and should have been declared by him assuming he is not claiming to be domiciled outside the UK (which he says he isn’t) and that for S87 neither he nor defined family members are within any excluded class of beneficiaries. It’s possibly an ambitious argument for HMRC to run but then they had NZ over a barrel because he would have feared (correctly as it turned out) that he would face career threatening consequences if the matter entered the public domain. So better to settle and hope confidentiality cloaked the affair.
On culpability presumably HMRC’s position was that he had completed his returns negligently by taking an over generous view of whether or not he had provided bounty to the trust and that in its ideal world (inhabited by very few taxpayers) he should have laid out clearly to HMRC why he did not regard himself as a settlor of the trust. Again he’s over a barrel and can’t countenance a tribunal hearing so he grimaces and pays up. But as it transpires to no avail because of your dogged endeavours. At this point, if I could, I’d insert a picture of a small violin.
Hi John and thanks for your email. What you say is definitely one of the approaches HMRC could have taken; but there are others (ERS, for example – although that could lead to a much worse tax outcome for Zahawi). I haven’t written about this in any detail, partly because it would be very long and technical (and nobody would read it!), and partly because we still don’t know how precisely Zahawi received the cash from the sale of the YouGov shares (although it seems certain that he did), or indeed anything about the trust (other than his parents control it). Which means it would be an even longer piece, branching down side-roads whenever it encounters an uncertainty. I would love to read such an analysis some day – but I will now leave that to others!
May I suggest one additional question that might help to understand what is going on. And then if you’ll allow it, a comment.
First some background.
* At the time YouGov was created in 2000, “founder” shares were issued to two of the three individuals involved in creating the company – Neil Bruce-Copp took 15% (he was the founder of Targus: he had bought the company that became YouGov as a shelf company called Haldeen Limited in 1998) and Stephan Shakespeare took half of the remaining 85% (that is, 42.5%). They both held the shares personally, in their own name. (As an aside, all three had connections to Jeffrey Archer, and no doubt there is an interesting story to tell there too.)
* But Zahawi says he arranged for the remaining “founder” shares – Zahawi’s shares – to be issued not to him but to his father, to recognise the contribution made to the start-up by his father. To quote Zahawi’s recent statement: “In the process, he [Zahawi’s father] took founder shares in the business in exchange for some capital and his invaluable guidance.” (Although the evidence suggests that his father did not make a significant contribution of capital or of advice at the time, and certainly not at a level consistent with taking nearly half the equity.)
* However, these “founder” shares were _not_ issued directly to Zahawi’s father to hold personally, like the other founder shares were issued directly to the two other individuals who were involved. They were issued to a Gibraltar company, owned (it seems) by a family trust (whose terms, as far as I am aware, are not known at all).
So the question: _Why?_
No one sets up a Gibraltar company, owned by a trust, by accident. Even if there is a desire to issue shares to the father, and to hold the shares through a company, why Gibraltar? And why a trust?
There are numerous tax-technical questions here (from residence and PE, through bare trusts, and more complex questions of trust law and settlements) but the main question it seems to me is: what was Zahawi _trying_ to do? What did he think the issue of “founder” shares to a Gibraltar company would achieve? Why would a long term UK resident (but quite possibly non-domiciled) person arrange for “his” portion of founder shares to be issued to a Gibraltar company which (it seems) was controlled by his father through a trust?
At that time, late 2000, an individual holding the shares in an unlisted trading company directly would have needed to keep the shares for just 2 years to get 75% taper relief, reducing the rate of capital gains tax to 10%, with no cap. Was that too much? Or was it more about inheritance tax?
And the comment.
The rates of capital gains tax have changed a bit since 2000 (it is complex: the headline 40% rate – but reduced with taper relief – fell to a flat 18%, and then a 28% rate was added, and now 10%/20% for most assets but 18%/28% for others, and the benefit of entrepreneurs’ relief is capped), but that is not important.
We should be celebrating with Zahawi that this person who fled from Iraq as a boy could find refuge in the UK and create a successful and profitable business here. (Perhaps some of those trying to cross the Channel in small boats might do the same, if given the opportunity.)
It is not so great that Zahawi seemingly thought he could find a way to avoid making a relatively modest contribution back to the society that enabled that success. Even with the penalties, if he has paid £5m and made gains of £20m or more, that would sound pretty good to most people, particularly anyone paying higher or additional rate income tax. But it seems even that relatively low tax rate was too much for him.
I have just looked up the HMRC guidance on penalties:
______________________________________________________
a penalty arises because of a lack of reasonable care, the penalty will be between 0% and 30% of the extra tax due
the error is deliberate, the penalty will be between 20 and 70% of the extra tax due
the error is deliberate and concealed, the penalty will be between 30 and 100% of the extra tax due
The penalty can be reduced if you or your client tells HMRC about the error. HMRC may make further reductions depending on the quality of the disclosure. Penalties can be reduced by:
telling HMRC about the errors
helping HMRC work out what extra tax is due
giving HMRC access to check the figures
______________________________________________________
30% (is that a definite fact?) therefore implies HMRC thought:
– the very worst sort of careless with no reduction for cooperation, or
– deliberate-and-concealed with maximum reduction for co-operation, or
– deliberate-not-concealed with some reduction for co-operation.
He says he co-operated, and given the speed, that seems likely…
Perhaps he is using “careless and not deliberate” to mean “not deliberate-and-concealed”.
Perhaps by “
Do we know if HMRC considered this to be an “offshore” matter? Because Gibraltar is a Category 2 territory, and the penalty range is somewhat wider, even for “careless” penalties. For unprompted, careless, it is 0% to 45%; and prompted, careless, it is 22.5% to 45%.
https://www.gov.uk/government/publications/compliance-checks-penalties-for-income-tax-and-capital-gains-tax-for-offshore-matters-ccfs17/compliance-checks-penalties-for-offshore-non-compliance-ccfs17
‘Deliberate’ means knowingly and intentionally.
So for not paying tax that is properly due to be ‘deliberate’, the person not paying the tax must:
– know the tax is due
– not pay it, in possession of this knowledge
Trouble is … say you are (or think you are) a super-smart, financially astute – multi-lingual across jurisdictions, entrepreneurial success story, who co-founded a (rightly) respected, worthwhile, and therefore valuable company (like YouGov) …
… And you and your menagerie of advisers on matters of law, efficient corporate structural arrangements, and HMRC practice, together, having thought it through carefully, GENUINELY THINK AND UNDERSTAND (sorry for red-top- style caps – needed to emphasise) that the nature of and interactions between whatever corporate/trust structures they’ve dreamt up and implemented fully and effectively shield the entrepreneur from a liability as a taxpayer in relation to their direct and/or indirect beneficial interests …
… then unless the basis on which this belief is founded is objectively ridiculous – to the extent that it’s pretty clear those concerned knew, plainly, that the structure is illegitimate / nonsense / essentially a means of concealing non-payment of the tax they know full well to be due …
… it’s very difficult to prove the taxpayer knew they had to pay the tax and, despite knowing this, didn’t, and chose instead to hide what they were doing, on purpose, with corporate structures, convoluted transaction journeys, and misleading or withholding disclosures.
People and advisers like this … they think they’ve got an airtight scheme that gets them beyond the scope of the tax rules. Their belief in their knowledge of the law and how to work things in their favour means that they don’t think there is a tax liability that they’re then not paying intentionally.
If they genuinely don’t think there’s a tax liability, then however misconceived this belief is, they can’t be said to be deliberately not paying – because they think there’s nothing to pay, since they’re clever little scheme shields them from it.
Please don’t take this to mean I approve – I absolutely don’t. But as a matter of law, people who have a genuinely held belief in something – however daft and conniving – are highly unlikely to possess the necessary mens rea – guilty mind – to be found to have done whatever rubbish shitty thing they’ve done ‘deliberately’
Dan – I am willing to bet Mr Z £1,000 (to a charity/political party of his/my choice) that when he uses “beneficiary” in the context of the trust that owns Balshore, he means he has no vested or current beneficial interest.
Instead, I suspect the trust terms will say something like: the beneficiaries are either not stated (but controlled by a protector or similar); or a class of people including any of the Mr H Z and his descendants. Most offshore trusts take the second option (they used to take the first).
As to the rest, agree with you on those within my expertise; the remainder (on detailed settlements) is fascinating. Thank you.