Last weekend, after many months of denials and even threats of legal action, the Conservative Party chair Nadhim Zahawi admitted that he had been in a dispute with the tax authorities which he had recently settled. He said he had made a “careless but not deliberate” error in his taxes.

Whatever else the error was, it was also expensive. Reports, not denied, have suggested that the bill Zahawi settled with HMRC was around £5m, with £1.3m of that comprising a 30% penalty.

Why did he owe so much tax?

More than 20 years ago, Zahawi co-founded the polling giant YouGov. But he didn’t take a personal stake; instead he gave his “founding shares” to a company in Gibraltar, Balshore Investments. We now know that Balshore’s listed owners are Zahawi’s parents, though in his public statement Zahawi only referred to his father.

Zahawi claims he gifted Balshore the shares because his father was entitled to them as an original investor. In his statement, Zahawi said: “Following discussions with HMRC, they agreed that my father was entitled to founder shares in YouGov, though they disagreed about the exact allocation.”

When Balshore sold those “founder shares”, it made a windfall profit. Whether or not Zahawi benefited from that profit was the nub of his dispute with the taxman.

HMRC has now apparently judged Zahawi personally liable for a large proportion of the tax on that windfall.

Why the ongoing focus?

Zahawi’s taxes may be settled, but many issues surrounding his account of his financial affairs remain unresolved.

For instance, it seems he reached the tax settlement with HMRC during his two-month tenure as chancellor of the exchequer, the UK’s ultimate taxman. This has prompted concerns about a significant conflict of interests. Labour described it as “shocking” and last week called for him to go.

Nor has Zahawi explained why he previously denied stories of having an issue with his taxes, and why he threatened legal action last summer against journalists and others who raised questions. This is particularly embarrassing for the government as it promises new laws to stop unfounded libel suits.

Zahawi has denied being a beneficiary of Balshore, the Gibraltar company at the heart of the tax dispute. But openDemocracy today reveals that he was actively involved in a company that Balshore co-founded, which at least suggests a closer relationship than he has admitted.

That company, Crowd2Fund, is a finance firm that has benefited from government deregulation. It is headed by Chris Hancock, a brother of Zahawi’s friend and former government colleague Matt Hancock, the disgraced former health secretary. Zahawi’s parents are listed at Companies House as “persons of significant control” at Crowd2Fund.

Chris Hancock told the Guardian in 2017 that Zahawi was “not involved hands-on” in the company. But an investigation by openDemocracy with SourceMaterial and The Times found Zahawi had been personally responsible for registering the firm’s website domain names, and had even maintained ownership of them for several years – including at a point when he had joined the government as a minister for children and families, in January 2018. This has raised further questions about his declarations as a minister in relation to his interests in Crowd2Fund.

What happens next?

Prime minister Rishi Sunak has asked his ethics adviser to investigate the details and timing of Zahawi’s settlement with HMRC and report back within days. Zahawi has authorised HMRC to share his tax information with the investigation. Sunak has said there are “questions that need answering” but Zahawi remains in post pending the outcome of the inquiry.

What does it mean for the government?

In his first speech as prime minister in October, delivered on the steps of Downing Street, Rishi Sunak said his government would have “integrity, professionalism and accountability at every level”.

Sunak’s commitment was seen as an attempt to set a new beginning for a government that had been plagued by issues surrounding ethics during Boris Johnson’s tenure in Number 10, and competence during Liz Truss’s brief spell in charge.

Things have not gone particularly well, with Sunak’s initial failure even to appoint an ethics adviser leaving the entire government in breach of the ministerial code within just weeks.

The UK’s richest-ever prime minister will also be acutely aware that the ghost of a previous tax scandal – his wife’s historical tax arrangements – hangs over his handling of this one. Akshata Murty’s non-dom status, from which she benefited before her husband became prime minister, allowed her to avoid paying UK taxes on her considerable overseas income.

Sunak’s handling of the Zahawi affair will be seen as a defining test of his premiership.