Al Fayed firm faces tax inquiry

The Inland Revenue is investigating whether a company belonging to Mohamed Al Fayed, owner of Harrods, has escaped paying millions of pounds in tax on two luxury blocks of flats in London's Park Lane.

Mr Fayed, who 10 days ago won his appeal against the Government's refusal to grant him citizenship and is now applying again for a British passport, has managed the blocks containing 112 flats since 1985.

Westminster City Council has passed evidence to the Inland Revenue suggesting the blocks were operated as hotels rather than permanent residences. Mr Fayed and his family use the penthouse of one block as their London home. Mr Fayed's company claimed all the flats were let on long leases but a council investigation concluded at least 80 were being rented out on lets of one to four weeks.

Long leases meant the blocks qualified for council tax of pounds 50,000 a year, but if they were short lets they should have been treated like hotels and made liable to business rates of pounds 1.1m. The council has asked the Inland Revenue's District Valuer to assess whether they should have been charged business rates.

The council's probe has also led to a planning dispute, since the company did not have permission to run them as hotels.

Papers passed to the Independent on Sunday show that Westminster Council investigated the blocks, 55 and 60 Park Lane, and found evidence they were being used for short-term lets. Among those who stayed in them were Damon Hill, LaToya Jackson, Diana Ross and business and Middle Eastern clients.

The blocks were managed by a private Fayed company called Hyde Park Residence Limited. Two shareholders own equal amounts of Hyde Park Residence: Mr Fayed and Prestige Properties, a company registered in Liechtenstein. The buildings were bought by Prestige in 1985. Four-bedroomed flats cost up to pounds 4,000 a week to rent while smaller flats fetched over pounds 1,000.

Last year a Westminster council official visited 55 Park Lane and was told by staff that the leases were for 90 days - the minimum period for qualifying for domestic rates - but they could not prevent people leaving earlier if they wished.

This explanation did not satisfy the council. A note by Gordon Chard, divisional development director, explains that last summer the council received reports that the properties were being used for short-term lets, not as permanent homes.

"A series of site visits were carried out ... which confirmed that the properties were being used for short-term letting contrary to their lawful use as residential flats," states Mr Chard. He continues: "From investigations it would appear that the breach of planning control in both properties commenced after 1989."

Last February Melvyn Caplan, the Conservative leader of Westminster, wrote to Laurie Ann Brown, general manager of Hyde Park Residence, saying that he had been advised by the council's director of planning that "Hyde Park Residence has a lawful use as permanent residential accommodation, although your company clearly does not use it for this purpose".

A letter from Roger Allard, the council's audit controller, says that Mr Fayed's company was told last April that the council "had evidence that 55 Park Lane was being used for short-term lets and in planning terms, its use was `hotel use'." Future use of the blocks, said the letter, would be determined at a planning inquiry in 1997. In the meantime, the Inland Revenue's district valuer, Allan Stripp, was considering how to assess the blocks. His inquiries continue.

As part of the planning application, Mr Fayed's property advisers explained that the majority of the flats were long-term lets but a slump in demand meant they were switched to short term. In a letter to the council, DTZ Debenham Thorpe, the advisers, said the company made the change without realising it required permission.

A spokesman for Mr Fayed said: "There is an issue over whether these apartments should have been assessed to domestic rate or business rate. There is a financial implication resulting from that because clearly if the authorities try to go back over the years it is going to be a very significant amount of money."

The company had complied all along with the rating authorities, so any fresh demand would be "viewed askance" by Mr Fayed, the spokesman said.