Rishi Sunak ‘was warned of reputational risk from Nadhim Zahawi tax affairs months ago’

Rishi Sunak received informal advice in October that there could be a reputational risk to the government from Nadhim Zahawi’s tax affairs, it has been reported.

Government officials are said to have given the new prime minister informal advice as he drew up his cabinet in October, regarding the risks from an HMRC investigation settled only months earlier.

Mr Sunak has come under pressure over his decision to appoint Mr Zahawi as Tory party chair, with questions too asked about his political judgement in doing so. He has insisted that “no issues were raised with me” when he appointed Mr Zahawi to his current role.

Downing Street has strongly denied the claim that Mr Sunak was warned of the risk. A No 10 spokesperson said: “These claims are not true. The prime minister was not informed of these details, informally or otherwise.”

The Independent revealed in July last year that HMRC was investigating Mr Zahawi and his tax affairs after inquiries were launched by the National Crime Agency and the Serious Fraud Office. The chancellor denied this and threatened to take legal action.

According to The Observer, Mr Sunak was warned back in October that the tax issue involved a significant amount of money.

It comes after the prime minister ordered an investigation into Mr Zahawi by Sir Laurie Magnus, his independent adviser on ministers’ interests, after the Tory chair paid a penalty as part of the dispute.

Mr Zahawi is believed to have authorised HMRC to discuss his settlement – estimated to be worth £4.8m including the penalty – with the ethics inquiry.

Mr Sunak this week told broadcasters: “I’m not going to prejudge the outcome of the investigation; it’s important that the independent adviser is able to do his work.

“That’s what he’s currently doing, that’s what I’ve asked him to do, and I’ll await the findings of that investigation.”

On 18 January, Mr Sunak told MPs at Prime Minister’s Questions that Mr Zahawi had addressed the fiasco “in full”. But he went on to launch an investigation, admitting there were “questions that need answering”, after the penalty was revealed.

Deputy Labour leader Angela Rayner urged Mr Sunak to “come clean”. She said: “The prime minister’s pathetic attempt to dodge scrutiny and skirt responsibility over Nadhim Zahawi cannot hold. He must now come clean on what he knew and when.

“The first hundred days of Rishi Sunak’s premiership have revealed a prime minister too weak to lead.”

It comes as a senior Tory peer and former chair of the Commons standards committee appeared to suggest that Mr Zahawi should step away from his Conservative Party role while the inquiry into his tax affairs continues.

Lord Young of Cookham, who served in a range of Conservative administrations from Margaret Thatcher’s to Theresa May’s, suggested that ministers who are under pressure should feel able to step aside for the duration of any investigation.

This will only add to calls for the Tory chair to stand down while under investigation for settling a multimillion-pound tax dispute while chancellor.

Speaking on BBC Radio 4’s The Week in Westminster, Lord Young said: “Last year, a minister was accused of an impropriety. He resigned and he was cleared.”

In an apparent reference to former minister Conor Burns, who had the Tory whip restored after being cleared of misconduct at the party conference in October, he said: “I think what a prime minister should do in those sorts of circumstances is bring the minister back, and I think that would give out a signal that [it] is not the end of your career if you stand back while the inquiry takes place.

“You can be rehabilitated if, indeed, allegations are proved to be untrue,” said the peer, who chaired the standards and privileges committee for nearly a decade.

The senior Tory said that a prime minister had to be “fair” to any minister facing damaging allegations. But he added that he hoped the inquiry into Mr Zahawi would not “take too long”.

He also called for the report into Mr Zahawi’s affairs to be published “in full”, as well as adding his voice to calls for the government’s ethics adviser to be able to initiate their own investigations.

Lord Young said: “I think a signal would be if that report was published in full. We’ve been promised a summary: well, I’d quite like to see the whole report.”

On Saturday, HMRC admitted it had made mistakes in the handling of a freedom of information (FOI) request centred on the tax affairs of ministers. HMRC had last year said that no minister was being investigated. But at the time, Mr Zahawi was the subject of an investigation by tax officials.

A spokesperson said that the response to a freedom of information request by tax lawyer Dan Neidle, who had been working to expose Mr Zahawi’s tax affairs, was believed to be incorrect, after Mr Neidle was informed that it was a backbench Tory MP and not a minister who was under investigation.

“We acknowledge that the processing of this FOI request was subject to a series of administrative errors, which we very much regret,” the spokesperson said. “We corrected these errors as soon as they came to light, and are confident that our most recent response to Mr Neidle was both accurate and in line with the Information Commissioner’s Office guidance.”

A Liberal Democrats source said the party is planning a “Shakespearean tragedy” in Mr Zahawi’s Stratford-on-Avon seat, with the constituency added to leader Sir Ed Davey’s tour of England ahead of the local elections in May.

Both the Lib Dems and Labour have called on Mr Zahawi to stand aside, but those calls have so far been resisted by both the prime minister and the Tory chair.

Amid the furore over his tax arrangements, Mr Zahawi visited a barber shop in his constituency on Friday, posting photos of the engagement on Twitter on Saturday morning.