Thread by @hselftax

So it’s Sunday morning, I’ve had a cup of tea and it’s time for a little #taxnerdery on the hot topic of #NadhimZahawi

1/n (fairly short 🧵 )

For the full story, all credit goes to @DanNeidle . See his timeline, his website or the article in today’s Sunday Times.

I am going to focus on the penalty Mr Zahawi has apparently paid, reported to be 30%

2/n

And for more technical detail on penalties, see @rbeccabeneworth comments over the last couple of days, in print and broadcast media.

In particular, this clip on Newsnight on Friday evening (from about 11:58)

3/n

https://twitter.com/danneidle/status/1616791427102433283

Per Mr Zahawi’s statement, he reached a settlement with HMRC on the basis that he has made a “careless but not deliberate” error.

4/n

First key point: he reached a settlement. This is a formal contract which both the taxpayer and HMRC sign to confirm their agreement to the terms reached.

It involves a formal acknowledgment by the taxpayer that he got his tax wrong.

5/n

The settlement was on the basis that the error was “careless but not deliberate”

I wrote a few comments on the difference earlier this morning

6/n

https://twitter.com/hselftax/status/1617068900214087681

Second key point - time limits. HMRC can raise a “discovery assessment” to make good a loss of tax, but it must be within:

- 6 years for a careless error
- 12 years for an offshore careless error
- 20 years for a deliberate error

gov.uk/hmrc-internal-…

7/n

(Zahawi reached a contract settlement, so there was no actual discovery assessment. But (almost) nobody agrees to a settlement which includes tax that HMRC would otherwise be out of time to assess)

8/n

Per @DanNeidle ‘s original post back in July 2022, there were 3 disposals of YouGov shares, in 2006, 2008 and 2017/18.

The first two of these were probably out of time.

9/n

Next question: why was the penalty 30% (as has been widely reported, and not denied - although not specifically confirmed - by Zahawi and his advisers)?

My colleague @nimshah14 commented that this was a great outcome by Zahawi’s advisers.

10/n

https://twitter.com/hselftax/status/1616741123514564609

HMRC publishes a table of the range of penalties that will arise for different types of errors.

Zahawi appears to be in the line marked:
- Careless
- Category 2
- Prompted

I’ve already discussed what “careless” means.

11/n

gov.uk/hmrc-internal-…

“Category 2” means that this is an offshore matter, to which higher penalties can apply, and that Gibraltar is a Category 2 country where penalties can be 150% of the normal level.

Hence the range here is 22.5% to 45% rather than the normal 15 to 30.

12/n

Oh - and these higher penalties came in around 2016. The key event was the sale of shares a year later.

13/n

So. Zahawi (or rather his advisers) negotiated this down to a “careless” penalty, which is much lower (and less embarrassing) than a “deliberate” one.

And they got to 30% out of a range of 22.5 to 45 - so a 2/3 reduction from the maximum, presumably for full co-operation

14/n

But….the potential penalty for an “unprompted” error can go all the way down to zero - not surprisingly, the aim here is to encourage taxpayers who have made a mistake to confess before HMRC investigate.

15/n

Mr Zahawi is reported to have paid a 30% penalty.

This strongly suggests to me that HMRC started investigating before he came forward, so that his disclosure was “prompted”. Extraordinary, and apparently confirmed by his own statement.

16/n

https://twitter.com/peston/status/1616823010433851393

And there is one more twist.

A taxpayer is responsible for his own tax affairs. But where the matter is complex, & the taxpayer has relied on an adviser whom he reasonably believes to be competent, this can be a defence to “careless” behaviour.

17/n

This can be a defence even if the taxpayer is sophisticated and knowledgeable in other areas - the case of Patrick Cannon v HMRC involved a tax barrister

…anceandtax.decisions.tribunals.gov.uk/judgmentfiles/…

18/n

This suggests that either Mr Zahawi did not take advice back in 2017/18 - or perhaps that it was thought to be a step too far for the Chancellor to claim not to have understood the tax system.

19/n

So in summary:
- Mr Zahawi has accepted that he made a “careless” mistake
- He was under investigation by HMRC so his disclosure was not “unprompted”
- It related to an offshore matter which carries higher penalties
- He did not manage to blame his advisers for the error

20/20

Updates based on comments:
- NZ has apparently said this was a U.K., not offshore, matter. If so penalty was maximum for careless.
- Dan N has commented that NZ may have willingly agreed to pay tax on full amount, even though some years were out of date, in order to settle.