Rishi Sunak was told there could be a reputational risk to the government from Nadhim Zahawi’s tax affairs when he appointed him as Conservative party chair in October, sources have told the Observer. During the period when the prime minister was drawing up his new cabinet, senior government officials gave him informal advice about the risks from an HMRC investigation that had been settled just months earlier, sources said. That included warning Sunak, whose knowledge of Zahawi’s finances at the time of his appointment has come under close scrutiny in recent days, that the tax issue involved a significant sum of money and was not a trivial accounting error, it is claimed. Downing Street strongly denied that Sunak, whose judgment in reappointing Zahawi has come under question, had been given an informal warning about Zahawi’s finances. There is no suggestion that Sunak was given a formal warning. A No 10 spokesperson said: “These claims are not true. The prime minister was not informed of these details, informally or otherwise.” Zahawi issued a statement last Saturday after the Guardian revealed he had paid a penalty to HMRC as part of an estimated £5m settlement. He said: “They concluded that this was a ‘careless and not deliberate’ error. So that I could focus on my life as a public servant, I chose to settle the matter and pay what they said was due, which was the right thing to do.” A spokesperson declined to comment further on the latest revelations. At the time of the reshuffle, Zahawi’s name had been privately linked to the role of education secretary, a post he had previously held, with some Tory insiders predicting he could return to the department, but he ended up with a less central position. The Tory party chair is battling to save his political career after he finally admitted reaching a settlement with the tax office after an error over a multimillion-pound shareholding in the polling company YouGov. Sunak, who has asked his ethics adviser to investigate the matter, told MPs on Wednesday that the “usual appointments process was followed” and “no issues were raised with me when [Zahawi] was appointed to his current role”. Days before the Guardian’s revelations and Zahawi’s public statement admitting the error, Sunak said that he had “addressed this matter in full”. Government sources familiar with the discussions about the cabinet appointments on 25 October have confirmed that no official “flag” or formal warning was raised over Zahawi’s tax affairs with the prime minister when he appointed him. They also confirm the usual process was followed. Various sources have claimed, however, that additional, informal advice was given to Sunak in the days around the appointment by cabinet secretary Simon Case and senior officials, warning him of reputational risks to the government as a result of Zahawi’s finances and the HMRC dispute. This included some details of Zahawi’s dispute with HMRC which had become available to the Cabinet Office and Downing Street via informal channels, according to sources. HMRC does not share detailed information about individuals’ taxes through the official appointment process for privacy reasons. While the prime minister did not receive a full breakdown or direct evidence of the settlement Zahawi made with the tax office, he was told that in such circumstances a penalty may be due, the same sources said. He was further advised that the tax issue had involved a significant sum, and that it was not a trivial accounting error. Sunak was also told that the HMRC matter had been resolved, sources claim, and an official Cabinet Office flag against Zahawi’s name had been dropped. The HMRC dispute was set against a backdrop of concerns at the top of government over Zahawi’s complex financial arrangements, according to insiders. The fresh claims come after the Guardian reported that Sunak had been briefed on an investigation into a minister’s tax affairs while he was the chancellor in summer last year. The matter was raised with him after a response to a freedom of information request was escalated by Whitehall officials. Downing Street has denied that he was told at that time that Zahawi was the minister under investigation. Sunak has asked his new ethics adviser, Sir Laurie Magnus, to investigate Zahawi’s tax affairs after acknowledging there were “questions that need answering”. Zahawi offered to share his tax information with the inquiry after the head of HMRC, Jim Harra, increased the pressure on him by telling MPs there were “no penalties for innocent errors”. The inquiry has, however, given the prime minister, who has reiterated his promise to run a government of “integrity and accountability”, time to deflect calls for Zahawi to be sacked. During the investigation, Zahawi will remain party chair, a job that over the next few months will involve masterminding the Tories’ strategy in the run-up to the local elections this spring. Sunak is under pressure on a number of fronts, amid a n investigation into mounting bullying complaints against the deputy prime minister, Dominic Raab, and a rising legal bill for Boris Johnson’s legal defence in the privileges committee Partygate inquiry.