Will we ever know what Zahawi did?

The issue

Media has been rife with reports of Nadhim Zahawi’s tax shenanigans. We appear to know the following ‘facts’:

1. He paid around £5m to HMRC to settle outstanding tax affairs.
2. This included a 30% penalty for careless, but not deliberate, tax behaviour.
3. This had something to do with founder shares in YouGov being held by Balshore Investments Ltd (Balshore).
4. Balshore was an offshore company owned by an offshore trust, set up by Zahawi’s parents.
5. The tax liability arose because (in some way) Zahawi benefitted from the proceeds from Balshore’s sale of YouGov shares in around 2017.
6. In particular, it seems reasonably certain that Zahawi did receive some funds from the offshore structure after the shares were disposed of.

We do not seem to know much more than this and neither does Dan Neidle, who was the tax lawyer who was instrumental in raising the profile of this issue.  There is virtually nothing written about the precise nature of Zahawi’s offence, and so I have tried to read between the lines of what may have happened based on tax law.

What might have happened?

The simplest explanation for this ‘carelessness’ is that Zahawi always retained beneficial ownership of shares that were legally owned by Balshore. This would mean that he should have self-assessed himself to a capital gain in respect of the disposal of the shares legally owned by Balshore.  If this was the case, then it would be interesting to know how Entrepreneurs’ Relief (ER) was factored into any calculations.  In 2017 there was a £10m lifetime limit for ER, but this had to be claimed within a year following 31 January after the tax year in question.  I therefore wonder whether he suffered the double penalty of losing out on ER, in addition to suffering the actual penalty.

Another alternative would be that it was accepted that the shares were properly owned (including beneficially) by Balshore, but the error arose when Zahawi failed to report the value that was returned from the offshore structure.  The rules around this are complex and the precise tax impact would depend on exactly how any fund flows were structured.

The real answer is likely to be a combination of the above, probably with a few other issues thrown in.

Forbes Dawson view

Tax advisers around the UK are hoping that full details of the structure will be released as a result of the ongoing enquiry.  Apart from satisfying professional curiosity, this may provide a useful marker about the boundary between ‘careless’ and ‘deliberate’ behaviour, as far as penalties are concerned.

We are unclear as to how the penalty rate has been determined, as we would have expected the more onerous offshore penalty rates to apply (although not the Failure to Correct penalties of up to 200%, as the transaction appears to have occurred post 5 April 2016).

Nevertheless, it is highly likely that HMRC thought that Zahawi was acting in a less than proper manner. 

The burden of proof for ‘deliberate’ behaviour is high and it would have been embarrassing to hold a former Chancellor out as a tax evader.  Hopefully, we will get the opportunity to consider this case based on the detailed facts…




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