The former chancellor Philip Hammond said he would not have accepted the job if he was being investigated by the tax office.

Asked by Sky News if it was “acceptable” that Nadhim Zahawi paid a penalty to HM Revenue & Customs to settle a tax dispute while in charge of the Treasury, Mr Hammond said: “My own personal view is that I would not want to accept the office of chancellor if I was at that time involved in a live negotiation of an outstanding tax case with HMRC.”

Politics live: Rishi Sunak heads for cabinet away day at Chequers

Mr Zahawi was chancellor in the closing days of the Boris Johnson administration and Mr Hammond said the former prime minister “has questions to answer” about his appointment to the cabinet.

“If he was aware of these issues, then I think the question falls at his door,” he said.

“Why did he appoint somebody to this role who clearly was not in a position to carry out that function?”

Mr Sunak has asked his ethics adviser to investigate whether Mr Zahawi, now the Tory party chairman, breached the ministerial code with the estimated £4.8m HMRC settlement he made while he was chancellor, but it could extend to his previous tax arrangement and whether he lied to the media.

Mr Hammond was chancellor under Theresa May and has previously said Mr Johnson was “not a good prime minister”.

Asked if Simon Case, the cabinet secretary who advises the PM, should take some blame, Lord Hammond said: “Well, ultimately it’s the prime minister who makes the decision who to appoint, who not to appoint to his cabinet, and what offices they should hold.

“It would have been a very different question if Nadhim Zahawi was being appointed to a different office of state.

“But the chancellor does have responsibility for HMRC, and I think that makes it very difficult for any individual being in a position of effectively negotiating with yourself a tax settlement.”

On Saturday, Mr Zahawi released a statement saying he had paid what HMRC said “was due” after it “disagreed about the exact allocation” of shares in YouGov, the polling company he founded.

The senior Tory MP said this was a “careless and not a deliberate error” and did not confirm if any penalty was also levied. But Sky News understands that as part of the settlement with HMRC – thought to be around £4.8m – the chairman paid a penalty.

‘No penalties for innocent errors’

HMRC chief executive Jim Harra said carelessness “is a concept in tax law” and people aren’t penalised if they make an “innocent error” with their tax affairs.

Appearing before MPs at the Public Accounts Committee, he stressed he was not talking about a specific case but said: “There are no penalties for innocent errors in your tax affairs so if you take reasonable care but nevertheless make a mistake, whilst you would be liable for the tax and for interest if it’s paid late, you would not be liable for a penalty.

“But if your error was as a result of carelessness then legislation says a penalty could apply in those circumstances.”

Mr Sunak has faced calls to sack Mr Zahawi, with Labour leader Sir Keir Starmer branding him “hopelessly weak” for failing to do so.

Please use Chrome browser for a more accessible video player


9:53

Keir Starmer asks Rishi Sunak about Nadhim Zahawi’s tax affairs

The prime minister told PMQs that while it would have been “politically expedient” to fire the cabinet minister, “due process” meant that the investigation into his tax affairs should be allowed to reach its conclusion.

No time scale has been set for the investigation, but Mel Stride, the work and pensions secretary, told ITV’s Peston programme it could be done within 10 days.

Trade minister Andrew Bowie has said Mr Sunak will “of course” sack Mr Zahawi if he has been found to have breached the ministerial code – but on Thursday Downing Street declined to get into hypotheticals and insisted the PM still had confidence in the embattled MP.

Mr Sunak is expected to be joined by Mr Zahawi when the cabinet meets for an away day at the prime minister’s grace-and-favour country house today.

The meeting at Chequers in Buckinghamshire is expected to focus on the government’s priorities for the country, but it has branded a “hideaway day” by the Lib Dems, who have accused the PM of “dodging scrutiny”.