Nadhim Zahawi dealt massive blow in tax row after extraordinary intervention by HMRC

Nadhim Zahawi has not made an “innocent error” in his tax affairs, the head of HM Revenue and Customs suggested, raising fresh questions about the cabinet minister’s £1m fine.

The Tory chair claimed he had “acted properly” with his tax affairs and that officials had judged his error to have been “careless and not deliberate”.

But James Harra, HMRC’s chief executive, told a cross-party group of MPs on Thursday that “there are no penalties for innocent errors in your tax affairs” – making clear that his organisation did not fine those deemed to have taken “reasonable care”.

“If you take reasonable care but nevertheless make a mistake, whilst you will be liable for the tax and for interest … you would not be liable for a penalty,” Mr Harra told the public accounts select committee on Thursday.

“But if your error was as a result of carelessness then legislation says a penalty can apply in those circumstances,” he added, stressing that he was not talking about Mr Zahawi’s specific case.

Labour’s deputy leader Angela Rayner said: “Nadhim Zahawi’s excuses are continuing to unravel.”

She repeated her call for Rishi Sunak to sack him, saying: “Having claimed he was in discussions with HMRC, it’s now clear he was in dispute with the taxman while he was chancellor and paid a substantial penalty that cannot be attributed to an innocent mistake.”

The prime minister is said to be “livid” at Mr Zahawi over the controversy, and a growing number of Tory MPs and peers are keen for Mr Zahawi to resign now – rather than wait for the outcome of the No 10 ethics investigation.

Tory backbencher Nigel Mills told The Independent: “Another day and it looks like it’s getting worse for him. It looks like his somewhat unclear statement [on Saturday] about a simple mistake is not holding water.”

Saying his position was “untenable” without a clear explanation, Mr Mills added: “HMRC thought he did something they really didn’t like. Penalties are serious, though there are degrees of seriousness. It comes down to him to explain it and clarify all this.”

Ex-Tory chancellor Philip Hammond also criticised Mr Zahawi, saying he would not have accepted the job of chancellor in the summer if he had been involved in a “live” HMRC investigation – first revealed by The Independent in July.

Former No 10 communications chief Sir Craig Oliver said Mr Zahawi “just has to go” now, or Mr Sunak should be advised to sack him to avoid further damage.

He told LBC: “I think somebody needs to take Rishi Sunak to one side and say, look, you’re trying to protect him, we sort of understand that. But be in no doubt that you are taking on a huge amount of damage with every minute that you keep him in that post.”

Mr Zahawi is understood to have paid a £1m penalty as part of a £4.8m settlement over a dispute related to the sale of YouGov shares held by offshore company Balshore Investments linked to his father. He said the HMRC had disagreed about the “exact allocation” of shares to which his father was entitled.

The Liberal Democrats said Mr Zahawi must “finally come clean” on the details of his penalty, and called on Mr Sunak to rule out a “stitch up” in the ethics adviser’s inquiry by confirming that HMRC will be given permission to assist in the probe.

Mr Harra told MPs that HMRC would help with Mr Sunak’s ethics adviser Sir Laurie Magnus’ investigation “in any way we possibly can”, but suggested he would only be able to share tax details if he had permission from the minister himself.

Mr Zahawi has given HMRC his approval to speak to the investigation into his tax affairs, a source close to the Tory chair later said.

Trade minister Andrew Bowie – a close Sunak ally – had told the BBC that if Mr Zahawi is found to have “fallen foul” by the ethics adviser, the PM will “of course sack him”. A No 10 spokesperson said on Thursday that Mr Bowie had been “giving his opinion” rather than speaking for the PM.

Asked about the HMRC chief’s remarks, Mr Sunak said he would “await the findings” of the ethics probe.

Speaking at Chequers where he has been holding a cabinet awayday – where he was joined by the Mr Zahawi – Mr Sunak again insisted that the senior Tory’s tax affairs were not raised with him when he appointed him in October.

However, one source told The Guardian that No 10 was informed of Mr Zahawi’s penalty and tax settlement with HMRC prior to his appointment as Tory chair. Downing Street denied that this was the case.

No 10 has not set a timeline or indicated the pace of the inquiry, only saying it hoped Sir Laurie could report back “swiftly”. Cabinet minister Mel Stride suggested the result of the probe could take as little as 10 days, while other reports suggest it could take three weeks.

Meanwhile, polling guru Professor John Curtice said Mr Sunak has “not proven himself to be that strong in dealing with the unexpected”, adding: “Being PM means being able to get on top of events when they begin to cause you trouble.”

He said: “The Conservative party is essentially flatlining. They were 20 per cent when Mr Sunak became prime minister. Now they are 21 per cent. And, in the meantime, Mr Sunak’s personal popularity has declined.”