On January 29 U.K. Prime Minister Rishi Sunak fired Nadhim Zahawi. Zahawi had been serving as Conservative Party chair, but we tax folks remember him for his brief stint as chancellor. He was also a co-founder of YouGov, the successful market research firm.
The basis for the sacking was an unfavorable report by an independent adviser, Sir Laurie Magnus, who had been tasked with investigating Zahawi’s compliance with the ministerial code of conduct. Magnus concluded that Zahawi failed to timely declare that he was under investigation by U.K. tax authorities. Sunak took the report as grounds for dismissal. The firing calmed the growing criticisms of Zahawi, which had become another headache for Sunak.
It’s not a good look when a Cabinet minister forgets to mention that HM Revenue & Customs is investigating him for irregularities. It’s a downright terrible look when the target of the tax probe happens to be the chancellor, or a former chancellor, charged with oversight of the nation’s tax laws.
Meanwhile, lawyer-turned-blogger Dan Neidle must be laughing himself silly, having played a critical role in Zahawi’s unraveling. Neidle is recently retired, having been head of tax at Clifford Chance in London. He runs a think tank, Tax Policy Associates Ltd.
Before I criticize Zahawi, I’ll praise him. It’s an impressive thing when a person grows a thriving business out of nothing. The world needs these entrepreneurs. They are job creators. I cheer for their success. However, the flipside of this admiration is that entrepreneurs must be on good terms with the tax man — especially as to the capital gains they experience when they sell their businesses. Shame on the business proprietor who uses the offshore sector to illegally conceal taxable income. That makes the rest of us chumps. This asks no more than what the law requires.
This column draws lessons from Zahawi’s sacking. Here are a few takeaways.
First, tempting as it may be, don’t dabble in the offshore sector to conceal your equity stake in a business enterprise. You’ll have nobody to blame but yourself when it ends poorly.
Second, if you’re facing a tax deficiency, it’s better to lose early than to drag it out. Coverups typically do more harm to one’s reputation than the predicate offense they try to obscure.
Third, it never pays to mess with #TaxTwitter. You’ll soon discover that the members of the tax bar and motivated journalists are remarkably resourceful.
The Rise to Power
Zahawi was born in Baghdad to a prominent family in the Iraqi-Kurdish community. One of his grandfathers served as governor of Iraq’s central bank. That was before Saddam Hussein came to power. In the late 1970s, Zahawi’s family fled to the United Kingdom, where his father became a successful businessman.
In 2000 the younger Zahawi co-founded YouGov with business partner Stephan Shakespeare. Zahawi served as YouGov’s CEO from 2005 to 2010, when he entered politics as a member of Parliament for Stratford-on-Avon, a seat that he still holds.
Over the next decade, he rose through Conservative Party ranks, eventually being appointed to a junior ministerial office by Prime Minister Theresa May as part of her 2018 Cabinet reshuffle. After May’s resignation in 2019, Prime Minister Boris Johnson retained Zahawi as undersecretary of state for business and industry.
LONDON, ENGLAND – In this handout image provided by No 10 Downing Street, Britain’s Prime Minister … [+]
The following year, Johnson gave him the additional task of coordinating the COVID-19 vaccine deployment, which placed Zahawi in a more visible role. In September 2021 Johnson elevated Zahawi to education secretary, as part of Johnson’s own Cabinet reshuffle. That was where Zahawi stayed, until the fateful events of the 2022 summer.
Sunak, then serving as chancellor, resigned from Johnson’s Cabinet on July 5, 2022. He exited in protest over Johnson’s role in various lockdown violations. Zahawi swooped in to claim the open position, but within 48 hours of becoming chancellor, he turned on Johnson, publicly calling for his boss’s resignation. Johnson announced his deferred resignation the same day. That left Johnson as caretaker prime minister for another two months, with Zahawi as his chancellor.
Prime Minister Liz Truss took office in September and installed Kwasi Kwarteng as chancellor. She kept Zahawi in her Cabinet. When Sunak replaced Truss, he appointed Zahawi party chair.
Something Rotten in Gibraltar
The controversy surrounding Zahawi’s taxes goes back to events that occurred two decades ago, though we learned of them only recently.
The more recent part of the story began in June 2022, when Neidle sent a generic Freedom of Information Act request to HMRC asking whether any Cabinet ministers were the subject of a tax inquiry. The agency responded in the affirmative, confirming that at least one minister was being looked at, without identifying the individual in question. This was before Zahawi became chancellor, while he served as education secretary. About two weeks later, Sunak resigned as chancellor.
LONDON, ENGLAND – FEBRUARY 13: New Chancellor of the Exchequer Rishi Sunak leaves 10 Downing Street … [+]
The day after Zahawi replaced Sunak as chancellor, The Independent published an article claiming that Zahawi had been the subject of an investigation by the National Crime Agency, the Serious Fraud Office, and HMRC. Separately, The Guardian reported that the Cabinet Office had raised a red flag about Zahawi’s tax affairs before his appointment as chancellor.
For whatever reason, the concerns of the Cabinet Office did not prevent the appointment. The red flags were ignored. Perhaps Johnson had other things on his mind, as his government was in the process of crumbling.
These disclosures prompted Neidle to examine the various public records regarding Zahawi’s previous role in YouGov. In doing so, he noticed something odd. It outwardly appeared that YouGov’s two co-founders, Zahawi and Shakespeare, each took a 42.5 percent stake in the enterprise. A company director, Neil Copp, held the remaining 15 percent.
What stands out is that Zahawi didn’t hold any founder shares — at least not directly. Instead, the shares comprising his equity interest were held by Balshore Investment Ltd., a company based in Gibraltar. By chance, Neidle found a filing glitch in the accounts of an unrelated company, Crowd2Fund Ltd., which established that Balshore was owned by a trust controlled by Zahawi’s parents.
Focus on Gibraltar on the Map. Source: “World reference atlas”
The problematic aspect of the arrangement was not that Zahawi’s parents had an offshore trust, per se, but that Balshore (owned by the family trust) was allotted shares reflecting a 42.5 percent stake in YouGov. The allotment appears to have been entirely gratuitous. There was no convincing evidence that Balshore, the trust, or Zahawi’s parents contributed anything meaningful to the firm’s start-up capital.
The shares in question should have been held by Zahawi, but they weren’t. That’s very suspicious. Within a few days, Neidle started to blog about the things he was discovering. He learned enough to say the holding structure for the YouGov shares was likely the result of tax planning. Zahawi repeatedly denied that was the case.
You can appreciate how the insertion of the Gibraltar entity might be useful to minimize taxes on future dividends and capital gains if that were a person’s objective. Typically, dividends received by a Gibraltar company are taxable only to the extent the underlying income of the payer company would have been taxable in Gibraltar. Unless YouGov’s profits were taxable in Gibraltar — which they weren’t — it follows that any dividends distributed to Balshore would have been tax-free in Gibraltar. Gibraltar doesn’t tax capital gains, period.
Zahawi was a U.K. tax resident, as you’d expect for an MP and Cabinet official. Should he have paid U.K. income tax on any dividends received from YouGov, or on the capital gain when the shares were eventually sold in 2017? That’s where the tax planning comes in. You might think that Zahawi wouldn’t be on the hook for those taxes because technically he didn’t own the shares. That’s unless you look through Balshore to regard Zahawi as the constructive owner of the shares.
Years earlier, there had been an unrelated news blurb concerning Zahawi and Gibraltar. In 2013 the Birmingham Mail reported that Zahawi financed the acquisition of a property in Warwickshire through a mortgage with a lender based in Gibraltar, Berkford Investments Ltd. The mortgage wasn’t illegal, but why not use a U.K. lender? The episode hinted at a connection between Zahawi and Gibraltar that some people found troubling for a public official.
Founder Shares, for Nothing
The day after Neidle’s blog post, Sky News interviewed Zahawi about the matter. This was during his first days as chancellor. He denied benefiting from the offshore trust and insisted that his taxes were fully paid. Initially, he claimed that Balshore held the YouGov shares because it was his father who provided the capital behind his investment in YouGov. If that were the case, there should be a paper trail to confirm it.
Neidle did more digging around and soon realized the available documentation didn’t match Zahawi’s explanation. He found postdated evidence that pointed to Balshore making an insignificant (£7,000) transfer to YouGov. The payment came two years too late, after the founder shares were already allotted. That’s not consistent with start-up capital.
Also, the amount of the transfer was way off. The other shareholder, Copp, had paid £287,500 for his 15 percent stake in YouGov. It follows that Zahawi’s stake (42.5 percent) would have required an upfront investment of almost three times the amount Copp had paid — a far cry from Balshore’s miniscule payment.
The narrative of the Sky News interview didn’t make sense. Neidle concluded that Zahawi had told a fib to the media and, by extension, to the U.K. public paying his salary. A subsequent blog post provided Neidle’s estimate of the income taxes that would have been due on the sale of the YouGov shares, had Zahawi held them individually. He estimated the capital gain bill at £3.7 million, based on what was known about the shares’ cost basis, the sales price, and the applicable rate on long-term gains.
Around this time, some key details of Zahawi’s explanations were changing. A proposition was floated that Zahawi possessed no experience running a business, and it was actually his father who played the essential role in YouGov’s founding by relying on his vast entrepreneurial talents. If true, this would have made the allotment of shares to Balshore less scandalous. It would have been the father’s founder shares, and the father’s capital gain. The father’s tax consequences would not have been Zahawi’s business.
As it turns out, Neidle found no convincing evidence that the elder Zahawi had anything to do with the operations of YouGov. The story seemed like a contrivance, intended to provide a nontax justification for why founder shares were placed with Balshore all those years ago. We call that creating a back story to suit the facts.
Later, Neidle stumbled upon an initial public offering document revealing that a £99,000 dividend from Balshore was redirected to Zahawi. The dividend refutes the argument, often repeated, that Zahawi never benefited from Balshore or the offshore trust. The IPO disclosure resulted from a one-time filing error. There easily could have been other dividends paid to Zahawi that we would never know about, because they weren’t inadvertently revealed. The ruse was falling apart.
SLAPP It Good
What happened next is a delicate matter. Neidle was contacted by lawyers from the U.K. firm Osbourne Clarke, which represented Zahawi. They urged him to retract commentary on his blog relating to accusations that Zahawi lied about his taxes, saying that those remarks crossed the line of propriety.
Neidle did the smart thing, requesting that Zahawi’s lawyers present their demands for retraction in written form, which they did. Neidle received their back-off letter and soon published it on his blog for all to see. Zahawi’s lawyers wanted the letter be kept confidential. You have to love the gumption: You must keep quiet about our efforts to keep you quiet about our client.
The letter asked Neidle to reconsider his allegations of dishonesty against Zahawi. Although it didn’t expressly threaten a libel suit, the language resembles a SLAPP job. If you’re not in the loop, SLAPP is an acronym for Strategic Litigation Against Public Participation. This is not to be confused with a Chris Rock slap in the face. SLAPP is how the rich and powerful of U.K. society use a thinly veiled litigation threat to silence their critics. A second letter from Zahawi’s lawyers denied that their first letter threatened a libel suit. The first rule of SLAPP is that you never call it a SLAPP.
Libel and Slander Claims on a desk.
U.K. libel law differs significantly from U.S. libel law. In the United Kingdom, a defamatory statement is effectively presumed to be false. Defendants bear the evidentiary burden of proving their statement to be true. There’s no requirement on the plaintiff to show malice, or to show that the defamatory remarks caused actual damages. The losing side can be charged the winning side’s attorneys’ fees.
In the United States, the remarks are effectively presumed to be true, and plaintiffs must prove falseness as part of their prima facie case. Each side generally bears their own litigation costs.
It’s not much fun to be a libel defendant in the United Kingdom. Neidle was staring down the possibility, and he didn’t flinch.
In addition to the postings on his blog, the whole drama played out on Neidle’s social media accounts, complete with hourly updates as new developments came to light. News of the apparent SLAPP job was circulated via #TaxTwitter. The whole world soon knew that something was up with the former chancellor.
Before you knew it, The Sunday Times was profiling Neidle, and Sunak was fielding embarrassing questions about the veracity of the people he appointed to high office.
Best as we can tell, Neidle’s preliminary estimate of Zahawi’s capital gain liability was quite accurate. The Guardian reported on January 20 that Zahawi had settled a tax discrepancy with HMRC for £5 million, which included a penalty assessment. HMRC doesn’t charge penalties in cases of innocent computational errors. While we still don’t know what the dispute was about, the reported settlement figure matches the estimated gain from the sale of YouGov shares (£3.7 million). Adding a 30 percent penalty brings a subtotal of £4.8 million. Throw in a bit of interest, and you get to £5 million, as reported.
The dust has now settled. Zahawi settled with HMRC — eventually. Zahawi was also fired, courtesy of the Magnus probe. Without our fearless tax blogger, I doubt that probe would have occurred. Neidle is still blogging about taxation. Despite abundant pressure, he didn’t retract a thing from his blog. To date, nobody has sued him for libel. I’d call that a fair outcome.
In hindsight, what was gained by having the founder shares allotted to the Gibraltar company, rather the person who should have rightfully held them? Absolutely nothing.