A SCOTTISH judge gave the go-ahead yesterday for a major tax investigation of Mohamed al-Fayed and his business empire, including Harrods and Fulham Football Club.

Mr Fayed had complained that Inland Revenue plans to sift through his financial affairs relating to two years in the late 90s were unreasonable and an abuse of power.

Lord Reed said tax officials could be criticised for a number of shortcomings in the case, but he ruled that their decision to launch a comprehensive inquiry into Mr Fayed had been free of political interference and was made in good faith.

In a judgment issued at the Court of Session, Lord Reed said Mr Fayed worked as a director of major companies, but did not appear to be paid a salary. He lived in expensive accommodation, but did not appear to own or rent it.

“Flats in Park Lane [London], for example, belong to an offshore company which rents them to a UK company, the rent being paid by another offshore company … A broadly similar situation exists in relation to Balnagown Castle [Easter Ross],” Lord Reed said.

“The private aircraft, the yachts, the horses, the domestic staff and other trappings of wealth are similarly provided by a variety of companies, most of which are located offshore, in such jurisdictions as Liechtenstein and Jersey,” he added.

The natural inference from the evidence he had heard, Lord Reed said, was that a great deal of ingenuity had gone into creating networks of offshore companies, trusts and other entities to minimise liability to tax.

“In the face of such opaque and sophisticated arrangements, it is important that the Revenue should be able to ensure UK tax liabilities are accurately assessed and accounted for. The ordinary taxpayer is entitled to expect that the Revenue will exercise its powers, when necessary, to obtain any information which it reasonably requires for that purpose,” Lord Reed said.

“By the same token, a taxpayer who chooses to receive accommodation and other benefits not by paying for them directly … cannot, in principle, complain if the Revenue’s inquiries are more wide-ranging than those directed at the ordinary citizen.”

The Revenue, through its Large Business office, in Glasgow, and Special Compliance office, in Edinburgh, announced in mid-2000 that it planned an in-depth review of the Fayed family’s tax position and that of any connected company or organisation for the years 1998 and 1999.

The decision followed Mr Fayed’s victory in the cash-for-questions libel case taken against him by the former MP, Neil Hamilton.

The trial had been followed closely by Inland Revenue officials, who were interested in evidence about Mr Fayed’s access to cash, and who concluded that “he had access to large amounts of cash, the source of which was unknown”.

Mr Fayed and several companies, such as Harrods and Fulham FC, raised the Court of Session action in which they sought judicial review of the decision to carry out the inquiry.They submitted that the decision was unreasonable and an abuse of power.

Their counsel, Richard Keen, QC, argued that the companies were to be investigated in order to provide an “in” to Mr Fayed. He said that was an improper motive for subjecting companies to a tax investigation which not only involved inconvenience and expense, but might also materially inhibit their commercial operations.

Patrick Hodge, QC, for the Revenue, submitted that it was a responsible body with a long-established reputation for propriety towards taxpayers.

He said a comprehensive inquiry was proposed, and nothing relevant to the financial affairs of Mr Fayed and his family was out of bounds.

Lord Reed said the Revenue had been “excessively reticent” about producing documents to the court, and there were signs of “a degree of muddle” in the handling of the case. However, he accepted evidence from officials that there had been no improper motive or pressure influencing their actions.

“I am satisfied that the decision to investigate was taken fairly and in good faith, for the purpose of fulfilling the Revenue’s responsibility for the collection of taxes, and not for any ulterior or improper purpose,” the judge said.