Downing Street denies Sunak was 'warned of Zahawi reputational risk months ago'

Number 10 has denied reports that Rishi Sunak received informal advice in October that Nadhim Zahawi's tax affairs could damage the government's reputation.

The Observer newspaper, citing sources, said government officials warned the new prime minister as he drew up his cabinet, referring to an HMRC investigation settled only months earlier.

A row over Mr Zahawi's tax affairs continues, after he admitted last week to paying seven-figure tax settlement while serving as Chancellor.

Mr Sunak has faced questions about his decision to appoint Mr Zahawi as Tory chairman, with questions too asked about his political judgment in doing so.

He has insisted that “no issues were raised with me” when he appointed Mr Zahawi to his current role, and Downing Street has strongly denied the Observer report.

A Number 10 spokesperson said: “These claims are not true. The Prime Minister was not informed of these details, informally or otherwise.”

The paper reports the claim that Mr Sunak was warned that the tax issue involved a significant amount of money.

It comes after the PM ordered an investigation into Mr Zahawi by Sir Laurie Magnus, his independent adviser on ministers’ interests after the scandal came to light.

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

Mr Sunak this week told broadcasters: “I’m not going to pre-judge 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.”

A week ago, Mr Sunak told 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.

Urging Mr Sunak to "come clean", deputy Labour leader Angela Rayner 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.”

A senior Tory peer and former Commons standards chair appeared to suggest that Mr Zahawi should step away from his Conservative Party role while the continues.

Speaking to BBC Radio 4's Week in Westminster programme, Lord Young of Cookham, said that if vindicated by the inquiry, Mr Sunak could "bring the minister back".

"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," said the peer, who chaired the Standards and Privileges Committee for nearly a decade.

“You can be rehabilitated if, indeed, allegations are proved to be untrue.”

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Lord Young said he hoped the inquiry into Mr Zahawi would not "take too long" and called for the report to be published "in full", rather than the "summary" that has been promised.

On Saturday, HMRC admitted that it had made mistake in the handling of a freedom of information (FOI) request centred on the tax affairs of ministers.

The Financial Times reported that in response to an inquiry by the paper last year, HMRC said that no minister was being investigated.

But at the time, Mr Zahawi was the subject of a probe by tax officials.

Tax lawyer Dan Neidle, who was working to expose Mr Zahawi's tax affairs, received a response to an FOI request believed by HMRC staff to be incorrect.

It was after he was informed that it was a backbench Tory MP and not a minister who was under investigation.

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“We acknowledge that the processing of this FOI request was subject to a series of administrative errors, which we very much regret," a 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.